page President Bush nominates Mark 4 Myers for top USGS spot

Vol. 11, No. 19 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of May 7, 2006 • $1.50

● JUNEAU Petroleum Directory goes quarterly House tackles gas, credit Van Meurs says 25% credit too risky; Econ One questions 2/3 gas exclusion By KRISTEN NELSON Petroleum News Contract release May 10 ouse Finance began hear- Timing of passage of the petroleum profits ings on the Senate’s ver- tax is uncertain, but Gov. Frank Murkowski con- H sion of the production firmed May 4 that he plans to release the gas line profits tax at the end of PATRICK JUDY fiscal contract May 10. April, then stepped away from He said he expects the Legislature to finish hearings on PPT to work on work on the PPT before the end of the regular budget issues. The committee session May 9. If that doesn’t happen the PPT was scheduled to take up work would be included in the call for a special ses- on the PPT again May 4, just as sion. Whether or not the PPT is completed in the this issue of Petroleum News regular session, Murkowski said, his intention is PEDRO VAN MEURS was going to press. to release the gas line contract on May 10. When consultants discussed the Senate CS for The governor said April 28 that he would Senate Bill 305 April 29, House Finance heard con- see CONTRACT page 26 see CREDITS page 24

● ANCHORAGE

Petroleum News' Petroleum Directory for Alaska and northern Canada Has oil production peaked? has switched from a monthly to a quarterly schedule; and has changed from a tabloid to a magazine format. The first edition (second quarter) is inserted in this issue of Petroleum News. Herrera: Statistics point to peak production; prices likely to go higher By ALAN BAILEY striking oil with a wildcat well, Herrera was TransCanada, Enbridge back at Petroleum News trained to be an optimist about finding oil. it re. Alaska gas and oil sands So, anticipating declining production really t’s well known that U.S. oil production goes against the grain with him. From their head office towers, which has been declining for many years. And, “Yet here I am,” Herrera said. “I find sit across the street from each other in I in Alaska, oil production is well past its myself a very strong proponent of the prob- downtown Calgary, TransCanada and peak. But has worldwide oil production lems associated with world peak oil, which Enbridge have resumed sniping at each peaked? And what impact might worldwide in most people’s minds is a negative posi- other over their rival plans to get Alaska oil production capacity have on already tion to take.” natural gas and Alberta oil sands to mar- soaring oil prices? ROGER HERRERA Herrera sees the statistics of oil field dis- ket. On May 1 Petroleum News discussed covery and production as providing the After a prolonged quiet period, the tit- these topics with Alaska oil industry consultant Roger pointers towards peak production. for-tat exchanges have resumed, with Herrera. “If you look at the sizes of the oil fields that are TransCanada Chief Executive Officer TransCanada CEO “I really have to believe that the world is very close added every year, they are smaller and smaller and Hal Kvisle saying his company is best Hal Kvisle to, if not past, peak oil,” Herrera said. we’re not replacing the oil that we’re using,” he said. placed to carry North Slope gas through Coming from a background as an oil geologist in Canada and to open up new links from the days when there might be a one in 20 chance of see PRODUCTION page 27 the oil sands to the U.S. Midwest. ● CANADA

His counterpart Pat Daniel begs to dif- PATRICK JUDY fer, especially on the oil sands front, arguing Enbridge has “many advantages, the prime one being significantly lower Mackenzie in crunch tolls.” Kvisle said Canada’s largest gas Imperial not ready to speculate on reviving over-the-top option for Arctic gas pipeline company is best placed to get Enbridge CEO Pat By GARY PARK North Slope production to the Lower 48 Daniel and, just for good measure, put For Petroleum News TransCanada in the driver’s seat in the race to the Midwest. ost pressures have not yet reached breaking see RIVALS page 26 point with the Mackenzie Gas Project, but could C make the venture uneconomic, or force a rethinking of design and construction, Imperial BREAKING NEWS Oil officials said. Company chairman Tim Hearn said “we’re not 12 Support builds for offshore: Comments to MMS favor close to pulling the plug,” but if costs get too high “we will have to reassess what we can do.” opening more OCS; eastern Gulf of most interest to industry “We can’t push billions beyond C$7.5 billion or I think we’ll have some pretty difficult decisions to 15 Development could slip: Gas prices, project expense, poli- make,” he said. tics could delay startup of Arctic gas field in Barents Sea The answers could be known later this year after the latest review of the numbers, which stand at C$7 17 The bigger, the better: Long-anticipated consolidation takes billion to develop the Mackenzie Delta’s three anchor fields and C$500 million for additional wells to sus- off in trust world; race to grow results in four deals totaling C$5.7 billion see CRUNCH page 28 2 PETROLEUM NEWS • WEEK OF MAY 7, 2006 contents Petroleum News A weekly oil & gas newspaper based in Anchorage, Alaska ON THE COVER FINANCE & ECONOMY House tackles gas, credit 7 Beating the budget blues in Canada Van Meurs says 25% credit too risky; 7 EnCana eyes standalone oil sands unit Econ One questions 2/3 gas exclusion 10 XTO Energy adds price hedges on gas, oil Contract release May 10 17 The bigger they are the better Has oil production peaked? 18 Oil company earnings chart 19 Felmy: Dispelling oil price myths Herrera: Statistics point to peak production; prices likely to go higher 21 Soaring energy prices fuel takeovers Mackenzie in crunch GOVERNMENT Imperial not ready to speculate on reviving 4 Bush nominates Myers for top USGS slot over-the-top option for Arctic gas 6 AOGCC public member bill on the shelf? TransCanada, Enbridge 9 Bolivia nationalizes natural gas industry back at it re. Alaska 9 Amended NPR-A grant program bill moves gas and oil sands 10 NWT minister pitches prospects in Texas 20 House approves oil price-gouging fine ENVIRONMENT & SAFETY 20 Congressional Research Service releases ANWR report 22 Group wants dispersants banned 23 Kempthorne backed sale of federal lands as U.S. Senator EXPLORATION & PRODUCTION LAND & LEASING 4 Akita to build new Arctic rig 23 Bush pushes ANWR drilling; expected to lift Bristol Bay ban 8 Apache drills 344 wells in first quarter NATURAL GAS 8 Precision pushes into U.S. with 11 rigs 13 Conditional ROW for spur expected soon 10 Canadian drillers brush off gas prices ANGDA working on business plan, outreach Rig utilization reaches 71% in first quarter according to entities that might want North Slope gas to drillers, 81% by FirstEnergy Capital count; 13 ANGDA picks Northern Economics to write plan ’06 completion target is 26,725 22 Senate Resources gets Pt. Thomson update 12 Support builds for U.S. offshore drilling 22 Alaska may partially subsidize Pt. Thomson development 14 Oooguruk photo feature from Judy Patrick 15 Development date could slip to 2020 PIPELINES & DOWNSTREAM 16 Nova Scotia says offshore explorers need 6 Enstar raises gas hookup fee by 4,000% to go deeper if they want results 8 Environmentalists score in Russia 17 Katrina, Rita destroyed 113 platforms 11 Flint Hills seeks help from Legislature 18 ANS oil production bounces back in April 12 Alyeska wins two API pipeline awards PETROLEUM NEWS • WEEK OF MAY 7, 2006 3 Alaska - Mackenzie Rig Report

Rig Owner/Rig Type Rig No. Rig Location/Activity Operator or Status The Alaska - Mackenzie Rig Report as of May 4, 2006. Active drilling companies only listed.

Alaska Rig Status TD = rigs equipped with top drive units WO = workover operations CT = coiled tubing operation SCR = electric rig North Slope - Onshore Doyon Drilling This rig report was prepared by Alan Bailey Dreco 1250 UE 14 (SCR/TD) Workovers DS9-35 BP Dreco 1000 UE 16 (SCR) Workover DS11-06 BP Dreco 1000 UE 16 (SCR) Workover Endicott Well 1-05/020 BP Dreco D2000 UEBD 19 (SCR/TD) Alpine CD2-404 ConocoPhillips OIME 2000 141 (SCR/TD) Kuparuk 1J-184 ConocoPhillips TSM 7000 Arctic Fox #1 Stacked in Yard Pioneer Natural Resources

Nabors Alaska Drilling

Trans-ocean rig CDR-1 (CT) Stacked, Prudhoe Bay Available PATRICK JUDY Dreco 1000 UE 2-ES (SCR) Prudhoe Bay DS 01-04A BP Mid-Continental U36A 3-S Prudhoe Bay DS 15-06 ConocoPhillips Oilwell 700 E 4-ES (SCR) Prudhoe Bay NGI-08 BP Dreco 1000 UE 7-ES (SCR/TD) C-22A BP Dreco 1000 UE 9-ES (SCR/TD) L-122 BP Oilwell 2000 Hercules 14-E (SCR) AKLAQ2 FEX Oilwell 2000 Hercules 16-E (SCR/TD) Stacked, Prudhoe Bay Available Oilwell 2000 17-E (SCR/TD) Stacked, Point McIntyre Available Emsco Electro-hoist -2 18-E (SCR) Stacked, Deadhorse Available OIME 1000 19-E (SCR) Stacked, Deadhorse Available Emsco Electro-hoist Varco TDS3 22-E (SCR/TD) Stacked, Milne Point Available Emsco Electro-hoist 28-E (SCR) Stacked, Deadhorse Available OIME 2000 245-E Stacked, Kuparuk Available Emsco Electro-hoist Canrig 1050E 27-E (SCR-TD) Prudhoe Bay AGI-07A BP

Nordic Calista Services Superior 700 UE 1 (SCR/CTD) Niakuk 14A BP Superior 700 UE 2 (SCR/CTD) S-103 BP Ideco 900 3 (SCR/TD) 3S-23A ConocoPhillips

North Slope - Offshore Nabors Alaska Drilling Oilwell 2000 33-E NorthStar NS-11 BP

Cook Inlet Basin – Onshore Aurora Well Service Franks 300 Srs. Explorer III AWS 1 Stacked in Nikiski Available

Kuukpik 5 Drilling Endeavour No. 1 Aurora Gas

Marathon Oil Co. (Inlet Drilling Alaska labor contractor) Taylor Glacier 1 CLU #11 Marathon

Nabors Alaska Drilling National 110 UE 160 (SCR) Stacked, Kenai Available Continental Emsco E3000 273 Stacked, Kenai Available Franks 26 Stacked Available IDECO 2100 E 429E (SCR) Stacked, removed from Osprey platform Available Rigmaster 850 129 Stacked in Kenai Available

Cook Inlet Basin – Offshore

Unocal (Nabors Alaska Drilling labor contractor) Not Available

XTO Energy National 1320 A Platform A C21A-23 XTO National 110 C (TD) Idle XTO Mackenzie Rig Status Canadian Beaufort Sea

Seatankers (AKITA Equtak labor contract) SSDC CANMAR Island Rig #2 SDC In cold shutdown at Paktoa Devon ARL Corp. Baker Hughes North America rotary rig counts* Mackenzie Delta-Onshore AKITA Equtak April 28 April 21 Year Ago Dreco 1250 UE 62 (SCR/TD) Stacked in Tuktoyaktuk, NT Available US 1,608 1, 591 1,325 Canada 150 176 160 Gulf 90 89 86

Yukon Territories Rig Status Highest/Lowest US/Highest 4530 December 1981 Northwest Territories US/Lowest 488 April 1999 Canada/Highest 558 January 2000 Ensign Resources Svc. Grp. Canada/Lowest 29 April 1992 Jackknife Double 55 Racked in Ft. Nelson *Issued by Baker Hughes since 1944

The Alaska - Mackenzie Rig Report is sponsored by: 4 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● WASHINGTON, D.C. Bush nominates Myers for top USGS slot

PETROLEUM NEWS offices in every state private sector. DGGS, Myers managed a research organ- n May 3, U.S. President George W. of the union, as well “The USGS is one of the premier sci- ization that included 38 scientists and Bush nominated former Alaska as several foreign entific organizations in the world. I am support staff. The state survey generates countries. With a honored and humbled to be nominated to analyses and interprets data on geologic O Division of Oil and Gas Division FORREST CRANE Director Mark Myers to head the budget of more than lead the survey,” Myers told Petroleum resources and natural conditions and prestigious U.S. Geological Survey. $1 billion a year, the News. May 4. maps and inventories mineral and energy Myers replaces Charles Groat, who agency leverages its In addition to serving as Alaska’s oil resources on state land. That information resigned almost a year ago after serving resources and chief, Myers concurrently served as is used by the government, private indus- as director since the Clinton administra- expertise in partner- Alaska’s State Geologist and director of try, scientists, educators and the public. tion in 1998. ship with more than MARK MYERS the State of Alaska Division of As director of the Division of Oil and Headquartered in Reston, Virginia, the 2,000 agencies of Geological and Geophysical Survey. Gas, Myers oversaw a professional staff USGS’ 10,000 scientists, technicians and state, local and tribal government, the Prior to that, he was a senior staff geolo- of nearly 100 employees, including geo- support staff are assigned to almost 400 academic community, other federal allies, gist for exploration at ARCO Alaska and scientists, engineers, land managers, non-governmental organizations, and the then Phillips Alaska. accountants, commercial analysts, and Earlier in his career, he was a petrole- auditors. um geologist for the Alaska Division of Myers, an expert on North Slope sedi- Oil and Gas. mentary and petroleum geology, served CALGARY Myers received his bachelor’s and as survey chief for field programs in the master’s degrees from the University of Mackenzie Delta (ARCO, 1985), Cook Akita to build new Arctic rig Wisconsin. He later received his PhD Inlet (State of Alaska/U.S. Geological Calgary-based Akita Drilling said April 27 that it’s nearing completion of a $13.2 from the University of Alaska. Survey, 1997), and North Slope (ARCO, million drilling rig that has been custom designed for use in “northern applications.” 1999). He also served as sedimentologist Akita is “engaged in contract negotiations” with a senior producer for use of the Scarlett praises Myers for 13 other North Slope field programs. rig. Acting Interior Secretary Lynn A past president and board member of Petroleum News’ sources say the producer is Calgary-based Talisman Energy and Scarlett praised President Bush’s nomina- the Alaska Geological Society, he is a cer- its Alaska subsidiary FEX. Dubbed the “Arctic Wolf,” the PN source said the rig tion of Myers to the top post at USGS, a tified professional geologist with the might be used by FEX in the National Petroleum Reserve-Alaska next winter. nomination that is subject to confirmation American Institute of Professional Akita said the rig will be operated under an existing joint venture and that Akita by the U.S. Senate. Patrick Leahy will Geologists; a certified petroleum geolo- will have a 50 percent ownership position once operations commence, giving cre- continue to serve as acting director until gist with the American Association of dence to the PN source who said Anchorage-based Doyon Drilling will be Akita’s Senate confirmation. Petroleum Geologists; and a licensed partner. Doyon and Akita recently completed the Arctic Fox rig for use on Alaska’s “Mark is known not only for his geologist with the State of Alaska. North Slope. accomplishments as a geologist and state Myers served as an officer in the U.S. —KAY CASHMAN survey manager but also for the consen- Air Force Reserve from 1977 to 2003, sus building approach he has emphasized retiring as a Lt. Colonel. throughout his career,” Scarlett said. “He He received his doctorate in geology brings more than 22 years of wide rang- from the University of Alaska-Fairbanks ing experience in geological science and in 1994, specializing in sedimentology, strong leadership skills to the U.S. clastic depositional environments, sur- Geological Survey.” face and subsurface sequence analysis As State Geologist and director of and sandstone petrography. ●

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Petroleum News (ISSN 1544-3612) • Vol. 11, No. 19 • Week of May 7, 2006 Published weekly. Address: 5441 Old Seward, #3, Anchorage, AK 99518 (Please mail ALL correspondence to: P.O. Box 231651, Anchorage, AK 99523-1651) Subscription prices in U.S. — $78.00 for 1 year, $144.00 for 2 years, $209.00 for 3 years. Canada / Mexico — $165.95 for 1 year, $323.95 for 2 years, $465.95 for 3 years. Overseas (sent air mail) — $200.00 for 1 year, $380.00 for 2 years, $545.95 for 3 years. “Periodicals postage paid at Anchorage, AK 99502-9986.” POSTMASTER: Send address changes to Petroleum News, P.O. Box 231651 • Anchorage, AK 99523-1651. PETROLEUM NEWS • WEEK OF MAY 7, 2006 5 6 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● ANCHORAGE Enstar raises gas hookup fee by 4,000%

THE ASSOCIATED PRESS Giard: New hookups subsidized proposed price increases would only exacerbate the problem. Each incremental increase in new nstar Natural Gas has started charging 4,000 “In essence, for every new customer that con- home prices serves only to price more buyers out percent more to install gas lines and meters nects to Enstar’s system, the rest of Enstar’s cus- of the market,” wrote executive officer Vicki on newly built homes, saying it hasn’t tomers subsidize 98.7 percent of installation costs E Portwood. changed the rate in more than 45 years. that will directly benefit just that new customer,” Portwood said Enstar should have gradually The Anchorage-based utility won approval wrote RCA chair Kate Giard. increased the charges over the last 45 years. from the Regulatory Commission of Alaska in Giard said the new rate reduces the level of “Home builders should not be forced to pay the April to raise the fee to $781 from $20. Builders subsidy paid by current customers from 98.7 per- prices of Enstar’s delay just because it waited will have to pay the fee and most will pass it along cent to 47.3 percent. Enstar will collect about $2 almost half a century to seek available relief from to home buyers. million this year from the higher installation fees, “In essence, for the commission,” Portwood wrote. every new customer The $20 charge, for new homes only, dates which “will be reinvested into other areas of the Cory Bradshaw, director of production for that connects to back to 1960, said Enstar spokesman Curtis system,” Thayer said. Enstar’s system, the Thayer. Anchorage builder Hultquist Homes, said his com- rest of Enstar’s cus- pany supports the rate increase because it’s been so tomers subsidize In an April 21 ruling, the commission decided Builders association objects 98.7 percent of to allow Enstar to start charging the higher fee long since the price of gas hookups was adjusted. The Anchorage Home Builders Association installation costs effective immediately. It found that the $20 pay- Of Enstar’s 125,000 customers in Anchorage, that will directly called the installation rate hike “exorbitant” in a ment only covered 1.3 percent of the average total Mat-Su and the Kenai Peninsula Borough, about benefit just that letter to the commission. new customer.” cost of $1,482 for hooking up a new home to gas 3,000 new ones will be affected by the installation “With new home prices at record highs, the —RCA chair service. increase this year, Thayer said. ● Kate Giard

● JUNEAU AOGCC public member bill on the shelf? By KRISTEN NELSON not supportive of the original bill, and that is why it is now Norman also said that knowledge or experience does not Petroleum News more generic. He said the original proposal was an effort to mean alignment with the interests of the oil industry. Some get something in writing, and said he thought the require- commissioners, he said, have come from the oil and gas t doesn’t look likely that requirements for the public ment would likely change as the bill was heard. In hind- section in the Attorney General’s office, and noted that his member of the Alaska Oil and Gas Conservation sight, he said, he would probably have worded the require- own experience as an attorney includes representing a range I Commission will be changed by the Legislature this ment differently and put in something related to the oil and of interests on the opposing side of the table from the oil year. gas industry. and gas industry. House Bill 300, requiring the public member of the Sen. Tom Wagoner, R-Kenai, asked if the person with three-member commission to have a fundamental working Complexity of industry the issue the least knowledge doesn’t sometimes ask the best ques- knowledge of the oil and gas industry, was heard and held Kohring told State Affairs that the oil and gas industry is tions. He said with the commission’s professional staff he by the Senate State Affairs Committee April 20 and had not so technically sophisticated that it is important that the pub- thought someone with experience making decisions and yet resurfaced May 3. lic member come in with fundamental knowledge of the analyzing data from staff might be more effective. State Affairs Committee Chair industry and compared the AOGCC to the Regulatory Norman said the commissioners do get recommenda- Gene Therriault, R-North Pole, said Commission of Alaska, whose members are required to tions from staff, but said if one of the commissioners lacks that before moving the bill he wanted have substantial experience. background that individual is going to be handicapped to look at why the current statute says John Norman, chairman of the commission, speaking in when it comes to asking questions. He said there isn’t a day the public member “need not be cer- support of the bill, told the committee the commission reg- when he doesn’t ask a lot of questions, but noted he has tified, trained, or experienced in ulates an increasingly complex oil and gas industry. training as a geologist and in oil and gas law and has either the field of petroleum engineer- Sen. Kim Elton, D-Juneau, said the work of the com- worked in areas related to the industry for 40 years. But ing or the field of petroleum geolo- missioners sounded similar to what legislators do, and there is no time to slow down for basic questions, he said. gy.” One member is required by Norman also said the commissioners participate on Rep. Vic Kohring noted that legislators don’t have special skills. The current statute to be a petroleum engineer and requirement for the public seat would allow the governor to national committees where Alaska’s view has to be pre- one a geologist with oil and gas experience — both those bring someone “from outside the box,” he said, and noted sented on a very technical level. requirements have been tweaked in recent years, with that the commission has a staff with expertise who could Both Norman and Kohring said there was no intent to generic engineering and geology having become oil and gas work with a commissioner much as legislators work with criticize any former members of the commission, but to try industry specific. staff on complex issues. to make it better. Norman also said that the bill’s require- HB 300 was introduced last May by Rep. Vic Kohring, Norman agreed that there is a comparison with legisla- ment of “training or experience that gives the person a fun- R-Wasilla, chairman of the House Special Committee on tors, but legislators, he said, necessarily have to be general- damental understanding of the oil and gas industry in the Oil and Gas, and originally required that the public member ists because they deal with a wide range of issues, while the state” is basically a tweaking of the requirements, not an be an attorney, have a degree in business management or commission is a very specialized agency that handles a establishment of “tight sideboards.” have substantial business management experience. The large number of permits, applications and orders. Therriault noted that the Legislature must confirm committee substitute which passed the House in March There really is not time for on-the-job training, Norman appointments to the commission, which gives legislators an required only “training or experience that gives the person said. A commissioner has to be able to hold their own in opportunity to question qualifications. a fundamental understanding of the oil and gas industry in deliberations with the other commissioners. That’s how He said he would hold the bill and have his staff work the state.” decisions are made, he said. with Kohring on the history of statutory requirements for Kohring told State Affairs that the administration was the commission.● PETROLEUM NEWS • WEEK OF MAY 7, 2006 7

● CANADA Beating the budget blues in Canada Nexen/OPTI Canada, Suncor, Canadian Natural Resources find ways to soften impact of higher costs, but none escape challenges By GARY PARK But OPTI has said it now favors gas. For Petroleum News seeking regulatory approval for a sec- Dykstra views gasification as a “step-change for oil ond and third phase at Long Lake, sands development,” observing that the “best place to be is ome oil sands operators are scrambling to escape adding another 140,000 bpd of bitu- the lowest-cost producer.” Canada’s high-cost environment; others see the chal- men, although a final decision has yet S lenge as an opportunity. to be made. Other projects Imperial Oil and Husky Energy have already In the meantime, by accelerating Others have apparently come to the same conclusion: flagged their reluctance to proceed with upgraders in planning and engineering work and • Canadian Natural Resources said its C$6.8 billion, first Alberta while labor and equipment limiting design changes, the partners stage of the Horizon project is reaching milestones sooner costs soar. expect to complete 30 percent of Nexen CEO than expected and within budget. Now Shell Canada has signaled its engineering work for the second Charlie Fischer Senior Oil Sands Vice President Real Doucet said there concerns by reviewing the economics phase by project sanctioning in 2008. will be challenges “due to the high level of activity” in of plans for building stage two of its OPTI President and Chief Executive Officer Sid Dykstra Alberta and a strategic decision last fall to postpone award- Athabasca project, which have said “the risk of material cost overrun is low” by taking this ing contracts. climbed from the C$7.3 billion fore- approach. But contract packages have been adjusted to better suit cast nine months ago, although the By retaining first-phase workers and doing the engineer- the marketplace and many have been issued that are closer company is not yet talking about ing work early, costs will be more certain at a time of to original budget projections. shelving the plans. unprecedented activity in the oil sands, OPTI said. Doucet cautioned that construction fuel costs have Chief Executive Officer Clive Shell Canada CEO Even so, the partners concede that labor productivity has climbed C$44 million over estimates and those associated Clive Mather Mather told Shell Canada’s annual been 20 percent lower than expected, because of organiza- with diesel are up C$36 million, but neither has been suffi- meeting April 28 the cost increases in all areas of the com- tional problems and worker inexperience. cient to derail the budget. pany’s business have prompted it to “look very hard at how However, Nexen Chief Executive Officer Charlie • Suncor Energy is taking its own aggressive route in we can mitigate those costs … and structure our projects to Fischer said “we’re pretty pleased with where we are, given tackling inflationary pressures by trailblazing on the tech- ensure their successful execution.” the pressure on labor.” nology front, Chief Executive Officer Rick George told the In this disturbing environment, Nexen and OPTI He said the joint venture is “getting ahead of the curve.” company’s annual meeting. Canada, partners in the Long Lake project, have decided to “The limitation is really labor,” he said. “Canada is not a “We’re not waiting for these technologies, we’re driving speed up expansion of the C$3.8 billion, 50-50 joint venture big country. You can probably only do about three of these them,” he said. rather than lose construction labor and their place in the developments at any one time.” One pilot project involves the use of mobile mining sys- line-up for materials and equipment. Nexen Chief Financial Officer Marvin Romanow said tems that could eliminate the need for massive trucks to As they close in on completion of the first 60,000 bar- the world-wide demand for components is so fierce that carry bitumen from mines. rels-per-day phase they are pushing ahead with new phases Nexen can’t afford a break between phases. There is also emphasis on ways to lower natural gas con- rather than taking a time-out. Underpinning Dykstra’s optimism is the use of propri- sumption at steam-assisted gravity projects, including the etary gasification technology developed by OPTI at Long injection of solvents into bitumen deposits and installing Originally four-phase development Lake, which involves the burning of soot as fuel rather than downhole pumps to aid the flow of the raw material, The original plan involved a four-phase development — natural gas to generate power and steam for the bitumen George said. two at Long Lake and one each at the Leismer and removal and processing. Suncor is also embarking on gasification by applying to Cottonwood leases, targeting combined synthetic crude The end result, OPTI hopes, will be a reduction in oper- output of 240,000 bpd by 2016. ating costs of C$18.20 per barrel over those who rely on see BUDGETS page 8

EnCana eyes standalone oil sands unit EnCana, North America’s second largest natural gas producer, is mulling the cre- ation of an oil sands division that could produce 500,000 barrels per day of bitumen by 2015. Chief Executive Officer Randy Eresman said the standalone company is a possi- bility after the big independent strikes a partnership with one to three major players to upgrade and refine its bitumen output. “One of the things that is pretty obvious to us is that the pure play oil sands com- panies today are getting tremendous value in the marketplace,” he said in a conference call. But he said EnCana can’t get serious about the idea until it has a downstream strat- egy in place. Chris Theal, an analyst with Tristone Capital, in predicting that a spin-off might occur. He said EnCana needs to unlock the assets to gain value it won’t receive so long as they exist within the larger company. Currently the company has shrunk a list of 20 possible suitors from the United States, Europe and Asia to take on the refining role at its oil sands leases to fewer than 10 and expects to make final choices in September. Speculation has Marathon Oil as a leading contender since the Houston-based company put out the word earlier this year that it wants to take a role in oil sands pro- duction to gain supplies for its U.S. refineries. Eresman said the candidates include the bulk of major U.S. refiners. BP is also on the short list. It unloaded oil sands holdings in the 1990s, but now needs secure supplies for its North American refinery network. “We’d like to make this process move ahead as fast as we can, but we’re talking about some very big decisions and a pretty complicated negotiation,” he said. “Effectively we’re trying to put a swap of assets together and that’s never easy.” Eresman said that if EnCana takes the spin-off route — allowing investors to more accurately value the assets — it could offer equity in up to half its 500,000 bpd in return for an ownership position in the downstream operations. In updating what it calls its unbooked resource potential — reserves it hopes to convert to the proved category in the near future — EnCana reported a 250 percent gain in its oil sands resources to 3.3 billion barrels. The gain was linked to the more exact development plans it now has in place for its Foster Creek and Christina Lake projects in Alberta. The company’s grand US$12.5 billion plan for the oil sands depends heavily on finding a partner to refine the bitumen production into lighter oil or a finished product such as gasoline or diesel fuel. Its first attempt at finding a match ended in December when Valero Energy, the largest refiner in the U.S., backed out of negotiations because of worries over the costs of building an upgrader. —GARY PARK 8 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● RUSSIA CANADA Apache drills 344 wells in first quarter Environmentalists Apache is setting a lively drilling pace in Canada, as natural gas production edges up while oil and natural gas liquids volumes shrink. The company drilled 344 wells in Canada in the first quarter, of which 187 are waiting to be tied-in to gathering and processing infrastructure. score in Russia The winter program was concentrated on Zama in northwestern Alberta, north- eastern British Columbia and Western Canadian properties that are part of a farm-out On Chernobyl anniversary Putin calls for Siberian oil pipeline to be agreement with ExxonMobil. Gas production in Canada averaged 386 million cubic feet per day, unchanged from the final quarter of 2005, but 11 percent higher than a moved 25 miles north of lake, world’s largest body of fresh water year earlier; oil averaged 21,691 barrels per day, down 1,586 bpd from the same peri- od of 2005; and NGLs declined to 2,178 bpd from 2,419 bpd. By ALEX NICHOLSON Greenpeace Russia spokesman Associated Press Writer —GARY PARK Yevgeny Usov called Putin’s decision ussian President Vladimir Putin called “wonderful.” … But he expressed continued from page 7 2011. April 26 for a planned Siberian oil hope that Putin would take the As well, Suncor is part of an industry R pipeline to be moved further from “principled” position of ordering BUDGETS group examining a carbon dioxide pipeline Lake Baikal, the world’s largest body that the pipeline be built where it of fresh water. system that would ship CO2 from oil sands would do the least damage, not the Alberta Energy and Utilities Board to upgraders to be injected in old oil reservoirs “I already said further north. Where fur- sticking to any specific distance build and run the industry’s first standalone in central Alberta to rebuild pressures and ther north it doesn’t matter,” Putin told the petroleum coke gasifier with an upgrader aid enhanced recovery, he said. chief of the state-run pipeline monopoly from the lake. Baikal’s drainage that will raise Suncor production to 500,000 Finally, George said Suncor is taking Transneft, Semyon Vainshtok, during a area does not run evenly around the bpd. some of its manufacturing orders outside meeting to discuss Siberia’s development lake, and Usov said that it could be George said gasification could slash the Alberta, although he conceded that inflation with regional governors. demand for gas by using an upgrading even more environmentally risky to is not confined to the province alone. Putin said that the route should be moved choose a route that runs through the byproduct to generate energy and hydrogen, more than 40 kilometers (25 miles) north of “It’s in North America and in this indus- mountains. but a gasifier is not likely to be built before try across the world,” he told reporters. ● the lake, the Interfax, ITAR-Tass and RIA- Novosti news agencies reported. That dis- tance, which would put the pipeline beyond Vainshtok reiterated April 26 his position Baikal’s drainage area, had been proposed that “170 kilograms of crude oil is the max- by the deputy head of Russia’s Academy of imum that could reach Baikal if something Sciences. unbelievable happened.” Putin, following a presentation by the Lake more than 5,300 feet deep scientist, said: “The pipeline must go further north than has been indicated.” Reaching more than 5,300 feet (1,620 meters) at its deepest point, Lake Baikal contains one-fifth of the world’s fresh water “I already said further north. and up to 1,500 unique species of plants and Where further north it doesn’t animals. matter,” Putin told the chief of the Environmentalists say that the regulatory state-run pipeline monopoly agencies responsible for vetting the planned Transneft, Semyon Vainshtok, route manipulated the review process in during a meeting to discuss Siberia’s Transneft’s favor. Greenpeace Russia spokesman Yevgeny development with regional Usov called Putin’s decision “wonderful.” governors. “We are very glad that the authorities have finally decided to listen to the opinion of the public, scientists and experts,” Usov Line will move crude to Pacific coast told The Associated Press. The 1.6 million-barrel-a-day pipeline is But he expressed hope that Putin would to run from Siberia’s Irkutsk region to a take the “principled” position of ordering town in the Amur region on the Chinese bor- that the pipeline be built where it would do der. Crude eventually will be piped to the least damage, not sticking to any specif- Russia’s Pacific coast, with a spur south- ic distance from the lake. Baikal’s drainage ward to China. area does not run evenly around the lake, Environmentalists say the pipeline, and Usov said that it could be even more which according to current plans is to pass environmentally risky to choose a route that less than a kilometer (half-mile) from runs through the mountains. Baikal, could ruin the lake’s unique ecology Putin chose the 20th anniversary of one in the event of a spill. The pipeline’s plan- of the world’s greatest environmental catas- ners have said that changing the route would trophes, the Chernobyl nuclear disaster, to entail great expense, and they claim that make his ruling following months of small minimal damage would be caused by a spill. protests in defense of Lake Baikal. ●

NORTH AMERICA Precision pushes into U.S. with 11 rigs Precision Drilling Trust, Canada’s largest oilfield contractor, is spreading its wings into the United States. Initially, it will divert one rig from Canada south of the 49th parallel, then build 10 rigs for delivery by the second quarter of 2008. “We believe the initiative will serve as an initial platform for growth in the United States market and represents an opportunity for Precision to demonstrate its capabilities,” said Precision President and Chief Operating Officer Gene Stahl. “The U.S. market offers an opportunity for higher year-round utilization,” he said, noting there is a “strong technical fit” for his company’s equipment and expertise in some key drilling markets. The new U.S. rigs will be rated to about 10,000 feet and will represent the next generation of the firm’s Super Single rig, employing proprietary hardware. The company expects the initiatives will require capital spending of about C$115 million as part of a planned increase in its 2006 capital budget to C$430 million over the next 18 months. Once it completes its full Canadian and U.S. expansion program in 2008, the company will have a fleet of 261 rigs, 250 operating in Western Canada and the rest in the U.S., compared with 230 rigs in 2005. —GARY PARK PETROLEUM NEWS • WEEK OF MAY 7, 2006 9

● LA PAZ, BOLIVIA Bolivia nationalizes natural gas industry Evo Morales gives companies six months to sign new contracts; production to be turned over to YPFB for sale, industrialization By ALVARO ZUAZO cubic feet of natural gas daily last year in Bolivia will be must be nationalized so Bolivians benefit and profits are no Associated Press Writer able to retain only 18 percent of their production, with the longer sent overseas. rest being given to YPFB, he said. Morales did not name the Morales chose May 1, International Day of the Workers, resident Evo Morales decreed the nationalization of companies. to announce the nationalization plan, wearing a miner’s hel- Bolivia’s natural gas industry May 1, threatening to Other major petroleum companies doing business in met as he gave his speech. After he spoke, a soldier unfurled P evict foreign companies that tap all of the country’s Bolivia include Britain’s BG Group PLC and BP PLC; a Bolivian flag from atop the natural gas installation. petroleum unless they sign new contracts within six France’s Total SA; and U.S.-based Exxon Mobil Corp. Morales also said the state would retake control Bolivian months giving control of the industry to the Bolivian state. hydrocarbons companies that were privatized in the 1990s, “The time has come, the awaited day, a historic day in Negotiations to begin immediately with the state taking over shares now in the hands of foreign which Bolivia retakes absolute control of our natural Morales said the government would begin negotiations companies and of semipublic Bolivian entities. resources,” Morales said from the San Alberto petroleum immediately with the companies to make sure they are will- With the nationalization announcement, Morales is fol- field in southern Bolivia operated by Brazil’s Petroleo ing to comply, but said they could be stripped of their priv- lowing the path of Venezuela’s President Hugo Chavez, his Brasileiro SA in association with the Spanish-Argentine ilege to operate in Bolivia if they don’t sign contracts with- populist political mentor, said Pietro Pitts, editor-in-chief Repsol YPF SA. in the six-month deadline. for the Venezuela-based LatinPetroleum.com. Bolivia has South America’s second largest natural gas YPFB used to produce Bolivia’s natural gas, but was Chavez has also taken moves to exert greater control reserves after Venezuela, and all foreign companies must reduced to an administrative capacity in the mid-1990s after over his country’s vast petroleum reserves. Most foreign turn over most production control to Bolivia’s cash- the country’s gas exploration and production business was companies have decided to keep producing in Venezuela, strapped state-owned oil company, Yacimientos privatized. Experts have warned that the company is inca- though some announced they would abandon some pro- Petroliferos Fiscales Bolivianos, Morales said. pable of becoming a producer again without a massive infu- duction. Foreign companies were also told that their production sion of cash. “You can call Bolivia Venezuela Part II because it seems would be turned over to YPFB for sale and industrializa- Morales, a strident leftist, won the presidency in a land- like he (Morales) is going to try to do the same thing that tion. slide late last year after saying the country’s natural Chavez is doing,” said Pitts, namely giving the state major- Multinational companies that produced 100 million resources had been “looted” by foreign companies and ity control in its fossil fuel wealth.●

● NORTH SLOPE Amended NPR-A grant program bill moves Bill addresses getting money from National Petroleum Reserve-Alaska lease bonus and royalty payments into Permanent Fund

By KRISTEN NELSON percent of “all mineral lease rentals, royalties, royalty sale How the distribution of the grant monies has been made Petroleum News proceeds, federal mineral revenue sharing payments and is “equally troubling,” but Wilken said that issue has been bonuses” the state receives shall be placed in the Permanent put aside in the spirit of compromise for another day. firefight between the state and the North Slope Fund. When Wilken testified April 27 in Community and Borough appears to have been averted — at least for His solution, introduced in Senate Bill 171 last year, was Regional Affairs he said that he had met with the North A this session of the Alaska Legislature — with a com- to create a committee within the Legislature to review the Slope Borough and others in trying to find a middle ground promise worked out in the House. grants and to set up a mechanism to ensure that 25 percent — the committee substitute, taking out legislative alloca- The issue is the 50 percent of federal lease bonus and of the federal monies go to the Permanent Fund. While tion of grants, was the result. royalty monies from the National Petroleum Reserve- grants to impacted communities would still have first call Dennis Roper, special assistant to North Slope Borough Alaska that go to the State of Alaska, funds Congress has on the funds, if 25 percent of the monies were not left to go Edward Itta for government and external affairs, told said should go first to communities impacted by oil and gas into the Permanent Fund in a given year, then the deficit Community and Regional Affairs that the borough has fol- development in NPR-A. amount would carry over from year to year until the lowed the issue very closely. The borough did not ever feel Sen. Gary Wilken, R-Fairbanks, introduced a bill last Permanent Fund received the full 25 percent. the legislation was necessary, he said, but can live with the year to address how these federal monies are allocated The North Slope Borough opposed the bill, especially committee substitute. between communities impacted by development and the distribution of grant monies by a committee of legislators, Roper also said he appreciated discussions in Senate state Permanent Fund. and there were acrimonious hearings in Senate committees President Ben Stevens’ office on how to revolve the issues. The federal allocation was established in 1980. In 1986 last year. He described those discussions as “difficult” but said they the Alaska Superior Court ruled that the monies were to be The Senate passed an amended bill this February. took place in a “fair and cordial atmosphere.” used for assistance to impacted communities before any A version of the bill dealing with just one issue has now Roper said the borough believes the Department of other state use and said it was the responsibility of the moved out of House committees. Community and Regional Affairs has done a good job in Alaska Legislature to examine and evaluate the claimed A committee substitute from the House Community and managing the grants. needs, rank them, and meet those needs out of the NPR-A Regional Affairs Committee cut out the legislative commit- He also said the borough appreciates the work done in revenues. The grants are currently administered by the tee, focusing on ensuring that 25 percent of NPR-A monies 1980 by U.S. Sen. Ted Stevens in Washington, D.C., in Alaska Department of Community and Regional Affairs. reaches the Permanent Fund. Wilken told House Finance working on this program to make the North Slope Borough Wilken said the way Congress directed the monies to be May 2 that only 6 percent of NPR-A funds have reached the a partner in NPR-A development. spent — for impacts first — created a conflict with the Permanent Fund since 2000 and said the bill puts into place Roger said there is no question that the subsistence Alaska State Constitution, which specifies that at least 25 a mechanism to fix that problem. lifestyle is the heart of the issue. ● 10 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● CANADA NORTHWEST TERRITORIES NWT minister pitches prospects in Texas Canadian drillers While the two key groups exploring for natural gas in Canada’s Arctic take their dispute over regulation of Mackenzie gas-gathering and mainline systems to the National Energy Board, putting the future development of the region in the balance, the Northwest Territories government is enthusiastically touting the brush off gas prices region’s oil and gas potential. NWT Industry Minister Brenda Bell said the Mackenzie Gas Project is only a Rig utilization reaches 71% in first quarter according to drillers, small fraction of the opportunities to explore a basin estimated to hold 100 trillion 81% by FirstEnergy Capital count; ’06 completion target is 26,725 cubic feet of gas, more than 16 times greater than the 5.8 tcf backing the Mackenzie plans. By GARY PARK tions, 500 more than last year, while aver- He told a Houston conference that in terms of the NWT’s ultimate gas poten- For Petroleum News age well depths in the first quarter added tial “it’s largely untapped.” about 33 feet to last year’s average 3,850 Bell is also confident that the Deh Cho First Nations, the lone hold-out among he plunge in natural gas prices this feet. aboriginal communities, will not pass up the economic rewards the project offers. year shows no signs of dragging down By province, Alberta is expected to log He said the “immense” upside potential for benefits for the Deh Cho, whose T Canada’s drilling sector. 20,935 wells and Saskatchewan 3,800, land covers 40 percent of the proposed pipeline right of way, won’t leave that The Canadian Association of each up 1 percent from 2005, while British money on the table. Oilwell Drilling Contractors reported that Columbia is on track for a 17 percent gain rig utilization reached 71 percent in the first to 1,600. —GARY PARK quarter; FirstEnergy Capital claims a The oil well drilling contractors group record 81 percent. reported that its member companies com- Either way, the industry at large is like- pleted almost 30 million cubic feet of hole FORT WORTH, TEXAS ly to agree with FirstEnergy analyst Kevin in the January-March period, helped by a Lo’s description of the performance over cold March which saw total operating days XTO Energy adds price hedges on gas, oil the three months by Precision Drilling, rise 24 percent to 50,271. Oil and gas producer XTO Energy said May 4 that it has Canada’s largest oilfield contractor, as The fleet of 792 rigs completed 7,880 added price hedges for future sales of natural gas and oil pro- “fantastic.” wells, beating the same period last year by duction through 2008. Precision’s drilling days and service rig 26 percent. A hedge is a way companies can reduce their risk relative operating hours were both up 19 percent The leading contractors were Precision to volatile commodities by setting a fixed price for future over a year earlier, profits climbed to (9 million feet), Ensign Energy Services delivery. C$224 million from C$138 million, sales (6.26 million feet), Savanna Energy (2.9 The company now has 40 percent of its 2006 equivalent rose 40 percent to C$536 million and the million feet), Nabors Drilling (2.19 million production hedges and 44 percent of its 2007 production. trust hiked its monthly cash distributions feet) and Trinidad Drilling (2.04 million For natural gas, the company has hedges ranging between by 15 percent. feet). $10.05 and $11.06 per thousand cubic feet, while its oil Bolstering this outlook, the Petroleum Precision, which recently switched to XTO CEO Bob Services Association of Canada set a well- the trust ranks, accounted for 27.6 percent hedges range from $68.38 and $74.27 per barrel. Simpson XTO CEO Bob Simpson said, “Given these robust price completion target for 2006 of 26,725, up 6 of all wells, compared with 30.7 percent a hedges, XTO has substantially secured our current plans of 11 percent to 12 per- percent from its October forecast and 8 per- year earlier, while Savanna climbed to 14 cent production growth in 2006 and at least double-digit growth in 2007.” cent better than last year’s benchmark. percent from 10.7 percent. —The Associated Press contributed to this report Services association President Roger Soucy said the industry’s expectation of Analyst: pressure on oil prices lower activity in response to lower gas On a broader front, Martin Molyneaux, prices has been set aside as producers chase FirstEnergy’s managing director of institu- coalbed methane and shallow gas tional research, told a petroleum services prospects, saying “it’s not worthwhile to luncheon that the loss of 3.5 million bpd of slow down.” refinery capacity during global turnarounds this summer will put upward pressure on Capital spending on drilling oil prices in the short- and medium-term expected to hit C$12B and a lack of success with the drill bit in Soucy said capital spending on drilling non-OPEC countries will drive prices over should grow to C$12 billion in 2006 from the longer term. C$11 billion last year, putting spending in He said one of the surprises has been the just the oil and gas service sector (not the lack of demand destruction as oil prices petroleum industry as a whole) on a com- have locked in above US$50. petitive footing with any industry in Molyneaux said oil prices are unlikely Canada. to stabilize until the global supply cushion The latest drilling forecasts were also climbs to 5-7 percent — an unlikely out- based on changes in the association’s price come until there is a world economic slow- forecasts. It now estimates AECO gas down. prices will drop to C$7.75 per thousand Regardless of a mild North American cubic feet from the C$9.50 it targeted in winter and current high storage, he is bull- October, while WTI oil prices have been ish on the outlook for natural gas prices, lifted to US$65 per barrel from US$60. but noted that a growing chunk of produc- The breakdown in the well predictions tion is uneconomic at less than US$6 per includes 3,500 coalbed methane comple- million British thermal units. ●

ntier F ro N575A

N575Q F rontier PETROLEUM NEWS • WEEK OF MAY 7, 2006 11

● ALASKA Flint Hills seeks help from Legislature Company wants tariff change retroactivity removed from its royalty oil contract; DNR says this was part of a larger bargain

By KRISTEN NELSON Petroleum News

lint Hills Resources Alaska has been working with the Department of Natural Resources to get F changes in its royalty oil contract and has now turned to the Legislature. With the end of the reg- ular session May 9, the company probably isn’t going to get help this year. The issue is retroactive adjustments to the sale price of state royalty oil from possible trans-Alaska pipeline tariff changes by the Federal Energy Regulatory Commission. Senate Resources heard and held a bill May 1 that would limit retroactive adjustments in the sale price of state royalty oil. The House version of the bill was referred to House Resources and had not been heard May 3. The legislation, Senate Bill 314 and House Bill 503, came out of the Senate Judiciary Committee and Judiciary Chair Ralph Seekins, R-Fairbanks, said in a sponsor statement that the intent was to correct an unin- tended consequence from the State of Alaska’s partici- pation in protests before FERC against trans-Alaska pipeline interstate tariff rates. Seekins said Flint Hills could owe retroactive pay- ments of as much as $50 million a year, forcing the Flint Hills said its North Pole refinery is competitive today because it buys crude oil at a discount to the West Coast price. company to reserve monies for this potential liability which the company has said could reach $200 million 2009 at the earliest, he said. DNR: RIK has to bring more than RIV or more. The potential liability to Flint Hills is $50 million Kevin Banks, petroleum market analyst for DNR’s As a result, Seekins said, the company cancelled a per year starting in January 2005, and the company has Division of Oil and Gas, told the committee that its reg- $175 million clean fuels project and a $91 million to reserve monies for this potential charge, and has can- ulations specify that royalty in kind cannot be sold for naphtha stabilizer project, has discontinued naphtha celled more than $260 million in capital projects as a less than the state receives for royalty in value. The production because that is a low-margin product and is result. purchasing 10,000 barrels fewer per day of the state’s state has always had retroactivity provisions in its roy- royalty oil, for which it pays a premium. Tariff deducted in price calculation alty contracts, he said, and some potential purchasers The Alaska Railroad has lost some $7 million in have said that because of the retroactive issue they Tony Sementelli, executive vice president and chief shipping revenue and the Port of Anchorage some $1 aren’t interested in buying from the state. financial officer for Flint Hills Resources, told the com- million in fuel flowage fees. Banks said in remarks prepared for the committee mittee the way its price for royalty is figured is based Seekins also said Flint Hills is not able to provide that the retroactive provision in the Flint Hills contract on the delivered West Coast price for ANS crude oil long-term contracts to fuel customers such as Golden was agreed to at the expense of other considerations for with deductions for marine transportation and for the Valley Electric Association. the state and is “just one part of a larger deal.” pipeline tariff, taking the crude oil back to a Prudhoe Based on the difference between proposed interstate Flint Hills has worked with DNR Bay value. The lower the tariff, the higher the amount tariffs for 2005 and 2006 ($3.71 and $3.96 per barrel) the company pays for crude at Prudhoe Bay, he said. and the RCA-ordered intra-state rate of $1.96 per bar- Jeff Cook, director of external affairs for Flint Hills Flint Hills will live by its deal, Sementelli said, but Resources Alaska, told Senate Resources the company rel, based on an average purchase of about 55,000 bpd, at the time the royalty contract was signed the Flint Hills could owe the state some $100 million for has worked with the Department of Natural Resources Department of Natural Resources said it expected the on the issue. DNR negotiates contracts for the state’s the 2005-07 period. TAPS Settlement Methodology to go to term. It is the Banks also said the Department of Law has identi- royalty oil and gas. Regulatory Commission of Alaska that has reduced tar- Cook said the tariff retroactivity is in the royalty fied some potential constitutional problems with the iffs, not FERC, he said, and the RCA decision on intra- bill. The state’s constitution specifies that natural contract Flint Hills signed, and he said the company state tariffs is still on appeal, with a final decision pos- considered that issue when it signed the contract. What resources be developed “for the maximum benefit of sible this year or next. the people.” In the ANS Royalty Litigation, Alaska it did not expect, he said, was that the state would If it takes years to reach a FERC decision, protest the TAPS Settlement Methodology prior to the Superior Court Judge Compton ruled that this prohibit- Sementelli said, the retroactive payment could end up ed DNR from collecting royalties in kind if that amount end of that agreement in 2009. Because the state signed being larger than the price Flint Hills paid for the refin- the settlement, Cook said, Flint Hills expected the state would be less than collected for royalties in value. ery. Under the bill, if FERC ruled to lower the interstate to defend it. The North Pole refinery is competitive today The protests the state filed in January of 2005 and tariff as RCA did the intra-state tariff, RIK would be because Flint Hills buys crude oil at a discount to the less than RIV, Banks said. ● January of 2006 will not be resolved until August of West Coast price, he said. 12 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● NORTH AMERICA ALASKA Alyeska wins two API pipeline awards Support builds for Alyeska Pipeline Service Co., operator of the trans-Alaska oil pipeline, has received two awards: the 2005 American Petroleum Institute Distinguished Environmental and Safety Award and the Large Operator Environmental Award. Alyeska said the distinguished operator award recognizes its “record in communi- U.S. offshore drilling ty outreach, activity promoting public safety, achieving sustainable results in environ- mental and safety performance, and demonstrating a forward-looking program for Two-thirds of comments on MMS’ 5-year plan favor opening more integrity management.” One operator a year is honored. Alyeska said requirements are of U.S. OCS to drilling; eastern Gulf of most interest to industry “so challenging that last year the review committee felt no operator deserved the recognition for 2004 performance.” By RAY TYSON “I would say that the Eastern Gulf Kevin Hostler, Alyeska president and chief executive officer, said the company has For Petroleum News sought the distinguished operator award for a number of years. of Mexico and its proximity to “This award emphasizes the values we place on safe operations, pening more of the U.S. offshore to known resources in the Gulf of environmental stewardship, regulatory compliance, and our exploration and development is clear- Mexico make it geologically much commitment to help improve the communities around us,” he O ly gaining momentum across more attractive. It’s just a natural said in a statement. America, according to recent opinion expansion of our pipeline The Large Operator Environmental Award is based on API surveys and thousands of public comments data that looks at the volume and numbers of spills per mile of submitted in response to the U.S. Minerals infrastructure.” pipeline. This is the fourth year in a row Alyeska has won this Management Service’s first draft of the pro- —Noble Energy chief executive Chuck award, the company said. posed 2007-2012 offshore leasing program. Davidson, chairman of the Independent In fact, heads turned when MMS Petroleum Association of America’s offshore Kevin Hostler, Alyeska had no crude spills in ‘05 Alyeska president Director Johnnie Burton told a luncheon committee Alyeska said the 800-mile trans-Alaska oil pipeline did not and CEO crowd May 1 at the Offshore Technology have a spill of Alaska North Slope crude oil in 2005. The last Conference in Houston, Texas, that more It now appears that Industry’s only hope spill the company had was in September 2003 when 10 gallons spilled to containment than two-thirds of some 36,000 public com- is that a few million acres might be added to at the Valdez Marine Terminal. ments received by the the existing Eastern Gulf Sale 181 area, a Alyeska said it was the only company to receive the large operator award for 2005 end of April favored sliver bordering the Central Gulf measuring environmental performance. giving industry more roughly 100 miles long by 25 miles wide. Alyeska was also recognized for Most Improved Safety Performance over three access to the U.S. “The point is that unless there is a major years, based on OSHA standards. To qualify for that award, Alyeska had to demon- Outer Continental change of heart in Florida — the delegation strate a 25 percent reduction in OSHA recordable rates, the company said. Shelf, 85 percent of as well as the governor — I don’t think you API began its pipeline awards in 2000 to recognize liquid pipeline companies for which is under mora- will see any drilling in the Eastern Gulf of advances in worker safety and environmental performance. The awards were toria and off limits to Mexico,” Burton said, adding that aside announced at the Annual API Pipeline Conference held April 25-27 in Fort Worth, drilling. from the possible tack-on to the Sale 181 Texas. Alyeska said trans-Alaska pipeline throughput averaged 891,104 barrels per Moreover, a public area the Bush administration “does not plan day in 2005, a total of 325 million barrels. The pipeline’s current throughput of less opinion survey con- Johnnie Burton, on going there. The administration is sup- than 1 million bpd represents some 17 percent of U.S. crude oil production. ducted in Virginia MMS Director portive of state desires.” —PETROLEUM NEWS State Sen. Frank Wagner’s district, which includes parts of Eastern Gulf industry priority Virginia Beach, showed 75 percent of those Meanwhile, Noble Energy chief execu- polled supported opening offshore Virginia tive Chuck Davidson, chairman of the to exploration. During an OTC press brief- Independent Petroleum Association of ing, Wagner said he is hoping efforts to open America’s offshore committee, made it offshore Virginia to drilling will rub off on clear in an interview at OTC that the other Atlantic Coast states. Eastern Gulf, more so than other areas “Since we stepped out in Virginia, there’s closed to drilling offshore the Lower 48, is been a lot more discussion in other states, an industry priority and probably represents particularly in the south,” Wagner said. industry’s best chance of opening more of “South Carolina and Georgia, even Florida the U.S. offshore “near term” to exploration is starting to broach the subject a little bit, and production. and North Carolina is starting to revisit it.” “I would say that the Eastern Gulf of Wagner said high gasoline prices, led by Mexico and its proximity to known fuel shortages following Gulf of Mexico resources in the Gulf of Mexico make it hurricanes Katrina and Rita last year, have geologically much more attractive,” led to more public support for drilling off- Davidson said. “It’s just a natural expansion shore Virginia. of our pipeline infrastructure.” The Western and Central Gulf of Nationwide survey shows same results Mexico, as well as most offshore areas of Both MMS’ comments and Virginia’s Alaska, have been open to federal leasing poll are supported by a recent nationwide for years. opinion survey conducted by the Consumer “I think it (Eastern Gulf) stands the best Alliance for Energy Security, a mix of con- chance of getting a little more area opened sumer, industrial and institutional energy near term,” Davidson said. “I think the Gulf users. The survey found nearly 60 percent of beyond that will take more action in those questioned wanted more of the U.S Washington.” offshore opened to E&P activities. Davidson said he also believes industry So, why the major shift in public senti- has “a much higher confidence level of ment? For one, an overwhelming 90 percent there being resources that are commercial” of those responding to the alliance’s nation- in the Eastern Gulf, compared to federal al survey believe increasing energy costs are waters offshore the U.S. East and West having a significant impact on the family coasts which for years have been closed to budget. leasing. “America is suffering an energy crisis “So, from an industry standpoint, from a which is hurting our economy and threaten- company standpoint, it’s very appealing,” ing our jobs,” said John Engler, president Davidson said, adding that although he and chief executive officer of the National believes additional areas of the Eastern Gulf Association of Manufacturers, a member of will be opened to leasing, it would not be the alliance. enough to satisfy industry. Still, MMS’ Burton cautioned OTC par- Nevertheless, Davidson was hopeful that ticipants that in spite of the public’s over- eventually more of the U.S. outer continen- whelming support, regional politics likely tal shelf, including offshore Virginia, would will limit the opening of exploration acreage be opened to exploration activities. in the government’s proposed five-year leas- “We’re seeing much greater support and, ing program. This particularly true in the far as a result, I think there is some hope that Eastern Gulf of Mexico, where Florida con- we will see one or more of these areas tinues to oppose drilling well over 100 miles opened up,” he said. “But certainly it starts from its shores, fearing this would ruin the around the Sale 181 area and then tries to state’s tourism industry. expand from there.” ● PETROLEUM NEWS • WEEK OF MAY 7, 2006 13

● ANCHORAGE Conditional ROW for spur expected soon Alaska Natural Gas Development Authority working on business plan, outreach to entities that might want North Slope gas

By KRISTEN NELSON Glennallen residents were interested in Petroleum News lowering their energy costs and at Lake Louise, even though the line doesn’t he Alaska Natural Gas Development come within 20 miles of the area, there Authority has participated in seven was interest in taking some gas off the T Department of Natural Resources spur, he said, and using either propane or public hearings on its proposed spur gas. line right of way from Glennallen to At Glacier View there was concern Palmer, Chief Executive Officer Harold about the project’s impact “the mountain Heinze told the authority’s board April over from them,” he said. 24. There were two hearings in The authority is a Chickaloon, with good discussion on con- corporation of the cerns, Heinze said, and one meeting each State of Alaska in Sutton and Palmer. In both Sutton and

which is working on FORREST CRANE Palmer people wanted to understand how delivering North the pipeline was coming through their Slope natural gas for area, Heinze said. in-state use. It chose On one three-mile Palmer stretch “we to develop a had a very good dialogue with homeown- Glennallen to Palmer ers there,” and as a result the route was right of way because The conditional right of way is moved. “Their proposal was just so sensi- this was the section important “because ble it was immediately apparent that they of a route to if it has a show were offering a better alternative,” he Southcentral Alaska stopper in it, we’re in trouble.” said. for which there was —Harold Heinze, The comment period on the draft right not a developed right CEO, Alaska Natural of way closed April 26. of way. Gas Development Authority The authority Right of way will be conditional applied for the right of way in April 2005 What the authority requested and what and the department issued a proposed will be issued, probably this summer, is a decision this February. Chickaloon resi- conditional right of way, Heinze said. dents had expressed concerns about the Twenty-six plans will have to be devel- right of way and ANGDA twice revised oped to perfect the right of way. Where the right of way in that area, moving it people have concerns about such issues as north of Chickaloon on to state lands, re-vegetation and restoration, Heinze said avoiding private property in the area. ANGDA asked people to express those Heinze said there was interest at the concerns to the Department of Natural meetings in access to gas, as well as con- Resources so they will be a part of the cerns expressed about the impact of the line. see SPUR page 16

ANCHORAGE ANGDA picks Northern Economics to write plan for link to ANS gas line The Alaska Natural Gas Development Authority said May 3 it has selected Northern Economics Inc. to write the enterprise business plan for its project to link North Slope natural gas to Southcentral Alaska. The plan includes market determinations, cost estimates, final business operations, project financing and financial analysis. Northern Economics has teamed up with Financial Engineering Inc., Michael Baker Jr. Inc. and Western Financial Group for the project, which will be led by Pat Burden and Cal Kerr, president and project coordinator ANGDA COURTESY PHOTOS respectively of Northern Economics. Joe Griffith, ANGDA’s enterprise coordinator is leading the authority’s overall work in determining potential business PAT BURDEN activities, market structures and financing. ANGDA is a public corporation of the State of Alaska cre- ated by a ballot initiative in the November 2002 general elec- tion. It has broad powers to acquire, condition, transport and market North Slope natural gas with emphasis on getting gas to consumers throughout Alaska at the lowest cost possible. Harold Heinze, ANGDA’s chief executive officer, is a for- mer president of ARCO Alaska and a former commissioner of the Alaska Department of Natural Resources. Griffith is a for- mer CEO/CFO of Chugach Electric. JOE GRIFFITH ANGDA has recently moved into new headquarters inside the Joint Pipeline Office building at 411 W. 4th Avenue in Anchorage. ANGDA’s board, appointed by Gov. Frank Murkowski, includes Andy Warwick, chairman, Scott Heyworth, vice chairman, David Cuddy, Bob Favretto, John Kelsey, Bob Stinson and Dan Sullivan. —PETROLEUM NEWS 14 PETROLEUM NEWS • WEEK OF MAY 7, 2006

Judy Patrick at Oooguruk

Photographer Judy Patrick shot these pho- tos in April at Pioneer Natural Resources' Oooguruk development on Alaska's North Slope shortly before gravel hauling to build the offshore island was completed. Ken Sheffield, president of Pioneer's Alaska sub- sidiary, said work for the rest of 2006 includes "armor offshore drill site with gravel bags, fabrication of facility modules, procurement of materials and services, modification of Nabors 19E," which Petroleum News sources say will be mod- eled after Nabors 33E, the rig used at BP's offshore Northstar field. In the first quarter 2007, Sheffield said Pioneer's contractors will "install offshore and onshore sections of flowline from the drill site" to the Kuparuk River unit, install facility modules and mobilize Nabors 19E. "The wells are expected to be brought on production as drilling progresses," with peak rates of 15,000-20,000 barrels of oil per day expect- ed by 2010, he said. PETROLEUM NEWS • WEEK OF MAY 7, 2006 15

● RUSSIA Development date could slip to 2020 Gas prices, project expense, politics could delay startup of Russia’s Shtokman Arctic gas field in Barents Sea

By RAY TYSON For Petroleum News

ussia could delay or constrain gas development in its portion of the UNITED NATIONS R Barents Sea due to the high cost of Arctic development and possibly to help drive up the price of its liquefied nat- ural gas exports, Rice University econom- ics professor Peter Hartley said May 3 at the Offshore Technology Conference in Houston, Texas. Hartley said it could be 2020 before Russia’s giant Shtokman gas field in the Barents Sea comes on stream, vs. prior estimates of 2011 to 2015. “Geological and economic fundamen- tals mean that Barents Sea natural gas and its use as LNG is a longer term prospect anyway,” Hartley said in an interview. “And it’s very expensive … and there are a lot of alternatives out there from around the world – not just LNG, but pipeline gas.” For the most part, Hartley and other members of a panel invited to OTC to dis- cuss offshore opportunities in Russia took a dim view of the country’s oil and gas politics, noting everything from Russia’s convoluted tax regime to limiting foreign involvement in projects, including Shtokman. Companies waiting to hear on participation Norway’s Statoil, which operates the Snohvit gas project in the Norwegian sec- tor of the Barents Sea, along with ConocoPhillips, Chevron, Total and Norsk Hydro, are hoping to hear soon from Russia’s Gazprom whether they’ve been selected to participate in Shtokman. “They are either going to announce the companies shortly, or they are going to keep delaying,” panel member Julia Nanay, senior director of PFC Energy’s Country Strategies Group, said on the OTC sidelines. Russia is holding its offshore “hostage to bureaucratic infighting” over proposed industry regulations and taxes that likely would be applied to Shtokman, as well as other offshore regions in the country, Nanay said. “In order to develop the offshore … you’re going to have to have some action on the part of the Russian government,” she explained. “That’s what is being held hostage” because of the infighting. Invited but conspicuously absent from the OTC panel was Sergey Feodorov, director of the Department for State Policy and Regulation of Natural Resources, Ministry of Natural Resources of the Russian Federation. Statoil a leading candidate Meanwhile, Norwegian participation in Shtokman and an unresolved boundary dispute between Norway and Russia in the Barents Sea are expected to be key themes discussed later in May when Russian Prime Minister Mikhail Fradkov makes an official visit to Norway. “As for the Russians, my bet is that I just never know,” Nanay said. “They never come to a conclusion on anything in the timeframe that you expect. Obviously, with Shtokman, they are going to need more company involvement, but do they delay it because they are busy with other things. What you get in Russia are these

see DEVELOPMENT page 19 16 PETROLEUM NEWS • WEEK OF MAY 7, 2006

tn T i Ewan pe s p

continued from page 13 u 28 Lake r o S 8

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v Lake ind Nelchina i Crossw

R Louise

Lake 27 a 7 SPUR n Petersville R er t k tna iv Public Use Area e Ga ee sh k O Gulkana l Ir 26 Ta on 6 record and can be addressed as ANGDA Creek ANGDA COURTESY T Sh ra ee p p R 25 develops its plan. p iver 5 e Talkeetna k r C After the public comment period clos- r Glennallen . ek 24 R l re 4 ina . Taz a C Matanuska-Susitna ittleNelchinaN ina River Tazl es the department will deal with all the ntan L el ch o Mt S overeign ree Borough 
C k 23 comments and issue a final decision on a M o e

o s 3 k C G D e conditional right of way. Heinze said he e e r 22 s C 2 h e Tazlina

k s e o iv r hopes to have that document this summer a a R o tn Lake R i M w ley i Trapper sh Matanuska Val 21 and the board will then decide if it will v a 1 e e K Moose Range r . Lak usitnaBasin r ntna C r S 12 accept the conditions. ate r e Hatcher Pass 11 St e v Willow Mountain rea 20 N p Use A 9 1 i ublic 8 Recreation p Critical Habitat P 7 10 E a 6 a r R 5 Klutina If the board accepts the conditions, Rivers T Area 3 4 Tonsin a 1 2 2 1 Lake n 4 3 19 r Y 6 t 5 e Heinze said the plan is to get a couple of 8 7 i w r 2 iv e s o Cre e l e Moose Cr. v R n i l k Sutton Ri u W a t n ka Chickaloon n n S s i things working “in a matter of weeks.” a ta u s a 18 n R 3 o a A Willow M k T nsin l i land Pea To e v Nancy Lake Fin These would include archaeological e
 e xa Lak n r d e Red uston Wasilla 17 issues and the design for crossing Moose r HShirto 4 C r Lake e e Creek. He said the goal would be to con- 16 k r Big Lake Palmer ker 5 e k  arcus Ba

v Mt M i Pioneer Pea

tract for work over the summer on about usitna Big Lake  R

sitna a 15 Mount Su n 6  t half of the 26 plan requirements. “It won’t
 i Eklutna s Knik u Lake Lower S e Mount Goode require 13 contractors; it will require l Lake  t For 14 t 7 s i Eklutna George Inner Chugach National Susitna Flat L e Refuge tR Lake three or four contractors.” The target State Gam annett Upper George Mount G Valdez ichardson Military Res.  13 Chugach 8 items would be ones “where the resources State Lake Forest ip Sh C George r Park may not be available to us next year.” He e e Coghill12 1 Terentiev9 2 k 3 Lake 4 Lake 5 said the scopes for those pieces of work 6 7 8 11 C ANCHORAGE 10 S have been written up. C t l f “We’ve purposely held back the Heinze said Copper Valley Electric is he said. At most the business plan “will have money” to get this work started, Heinze very interested: “I did not have to encour- A second issue is shipping through the several clear alternative choices,” he said, since you can’t even get a contract age anybody in Glennallen to come to the line: “Who makes the decision to basical- said. The board will sign off on the busi- number in the state system unless you meeting because Copper Valley Electric ly buy gas, where do they buy it, how do ness plan and may decide to keep only have the money. did.” they sign shipping agreements?” ANGDA some alternatives, allowing it to make The conditional right of way is impor- Two key issues for ANGDA’s business “may have no role,” other than providing some decisions on what the organization tant, he said, “because if it has a show plan, Heinze said, will be whether information, he said. “It may be that we will be in the future and roles it will play. stopper in it, we’re in trouble.” Heinze ANGDA builds a spur line or participates end up as an aggregator. We may cut an The business plan will also be important said if there is no show-stopper in the in building a line. arrangement with every utility in this in developing information for tariffs and conditional right of way it will take a cou- Or, like the Wyoming Natural Gas area” and make the commitment so local open seasons and for talking with utili- ple of years to do all of the work required. Development Authority, simply facilitates utilities don’t get shut out. ties. the project. All they did was put up a line Those decisions, Heinze said, are what “In particular there is certainly a focus Open season access issues of credit, he said. ANGDA will be working through in its in this business plan on making sure ANGDA is about to begin an outreach Heinze said if ANGDA could play that business plan. we’ve thought through all the alterna- on open season issues. Heinze said people role it would; if it needs to design and tives,” he said, along with a lot of empha- at the spur line right-of-way meetings build the spur line, it will. Traditional business plan sis on analytical work. were very interested and in some areas, That issue is unanswered, “and a lot of He said requests for proposals for a The plan will look at the impact on the like Lake Louise and Sutton, would need it has to do with who else wants to build contractor for the authority’s business gas cost, he said: “We will do basically a to form organizations. a line” — there may be others out there, plan have closed and the evaluation com- cost of service analysis,” how would the mittee is looking at the proposals and will authority move gas at the lowest possible make a decision soon. The request for cost. proposals was to produce a traditional Heinze said he expects to have a plan business plan which will be used when in front of the board this fall. the authority approaches financial firms A half a million dollars have been bud- and potential partners. geted for the business plan. ●

NOVA SCOTIA Nova Scotia says offshore explorers need to go deeper if they want results Nova Scotia’s Department of Energy believes deepwater explorers frustrated with dry holes offshore Nova Scotia might be more successful if they drilled to greater geological depths. “Not necessarily in deeper waters, but to deeper depths; or, in shallower waters, but to deeper depths,” Sandy MacMullin, director of resource assessment and royalties for Nova Scotia’s energy department, said May 2 at the Offshore Technology Conference in Houston, Texas. He said the energy department plans to unveil a comprehensive study in June suggesting explorers go deeper. Six of seven deepwater Nova Scotia exploration wells thus far drilled in water depths greater than 1,500 feet have come up dry, with Marathon scoring the only discovery on its Annapolis prospect. That well was drilled to a geological depth of about 17,680 feet. Nova Scotia’s energy department, which has access to all of industry’s offshore seismic studies and well data, has constructed a computer model simulating paths migrating hydrocarbons might take. “We know the hydrocarbons are there, and we know the reservoirs are there, although we aren’t quite sure where they are,” MacMullin said. “But there is a suggestion that they are in deeper waters.” Only 200 wells have been drilled offshore Nova Scotia, 120 of which were wildcats and the rest producers, in an area roughly one-fifth the size of the Gulf of Mexico. Nova Scotia’s energy department estimates the region’s entire offshore contains 40 trillion cubic feet of natural gas. However, the ExxonMobil-operated Sable field, located in shallower waters of the outer continental shelf, is the only producing field offshore Nova Scotia, gen- erating about 400 million cubic feet of gas per day. Deepwater exploration has occurred on just one one-tenth of Nova Scotia’s 540-mile offshore area. “We haven’t even begun to look at that nine tenths of what’s left along the shelf,” MacMullin said. —RAY TYSON PETROLEUM NEWS • WEEK OF MAY 7, 2006 17

● CANADA The bigger they are the better Long-anticipated consolidation takes off in Canadian energy trust world; race to grow results in four deals totaling C$5.7 billion in 10 days at the end of April; ’05 deals totaled C$15.6B

By GARY PARK ing 122 million boe of proved plus prob- monthly cash distributions flowing. For Petroleum News able reserves. Scotia Capital analyst Grant Hofer said in a note to clients that recent months trickle has quickly turned into a tor- Analyst: has been have bolstered the view that larger trusts rent as the Canadian energy trust need for consolidation have “significant advantages” over their A sector undergoes its most dramatic William Lacey, an analyst with smaller-cap peers. reshaping since it first surfaced in FirstEnergy Capital, told the Financial The inclusion by Standard & Poor’s of the 1990s. Post the flurry was “remarkable, but the 30 trusts in the Toronto Stock Exchange In the space of 10 days at the end of need for consolidation has been obvious.” benchmark index this year and the growth April, matchmakers pulled off four trans- Over recent years, the spotlight has of trust listings on U.S. markets means actions worth a combined C$5.7 billion been on a scramble by mid-sized compa- the larger operations can benefit from and involving about 215,000 barrels of oil nies to join the trust ranks in pursuit of lower capital borrowing costs, making equivalent per day. sustainable production. them more competitive in a tight asset It was exactly what observers have Now that those entities are faced with market. been pointing to, but the rash of deals the challenge of achieving economies of Advantage Chief Executive Officer caught most of them off guard. scale, the industry has anticipated a wave Kelly Drader said the fact that his trust has just listed on the New York Stock Deals announced of consolidation, which was slow coming — with only four deals in the past year — Exchange increases the pressure to grow, Here’s what occurred, pending unit until the dam broke in mid-April. gaining market visibility and liquidity, holder and regulatory approvals: The simple explanation is that the and appeal to a broader range of • Penn West Energy Trust absorbed the maturing Western Canada Sedimentary investors. assets of Petrofund Energy Trust for Basin has trimmed opportunities to grow Kim Hong, assistant vice president at C$3.1 billion, creating a super trust carry- through acquisition. Dominion Bond Rating Service, agreed ing an enterprise value of C$11 billion, A tightening asset market is reflected with that sentiment, saying “size is producing 135,000 boe per day (balanced in the fact that only 35,000 boe per day increasingly more important in the trust between oil and natural gas) from proved was on the block at the start of April — industry, driven by competitive and cost plus probable reserves of 515 million boe 21,000 boe per day listed by private pressures.” and having access to 4 million acres of Samson Canada and the rest by Profico She said size allows trusts to hire tal- undeveloped land. — compared with more than 80,000 boe ented managers, build their drilling pro- • Daylight Energy Trust and Sequoia per day a year ago. grams and gain access to the financial Energy Trust pulled off a C$785 million Those offerings are far short of the means to work on longer lead-time proj- merger to pump 24,500 boe per day (65 200,000 boe per day analysts estimate ects such as Penn West’s carbon dioxide percent natural gas) from proved plus trusts need to replace the annual decline sequestration project in Alberta. probable reserves of 68.5 million boe and in their reserves. They also have the backing to compete holding 56,000 net acres of “high-impact for and buy reserves that hit the market, gas exploitation resource play.” Rash of deal making last year she said. ● • Focus Energy Trust snatched one of Last year, the rash of deal making by the most highly-rated prizes, paying trusts involved 46 purchases and one sale C$1.12 billion for the bulk of assets con- valued at C$15.6 billion and totaling trolled by privately owned Profico 311,000 boe per day of Canadian produc- Energy Management, boosting its pro- tion, compared with C$8.5 billion and duction by almost 10,000 boe per day to 147,000 boe per day in 2004. 25,250 boe per day, but paying a stagger- Analysts such as Bruce Macdonald ing C$83,000 per flowing barrel of pro- with Canaccord Adams do not expect a duction, in line with what Penn West repetition this year of divestitures on the paid. scale of 2005 activities by large inde- • Advantage Energy Income Fund pendents. swooped on Ketch Resources Trust, The outlook is compounded by the offering C$725 million to land 13,400 retreat of potential sellers during a period boe per day, raising its output to 30,500 of uncertain gas prices. boe per day (70 percent natural gas and Consolidation has many benefits other the rest oil and gas liquids) and aggregat- than just allowing trusts to keep their

GULF OF MEXICO Katrina, Rita destroyed 113 platforms Hurricanes Katrina and Rita destroyed 113 petroleum production platforms in the Gulf of Mexico, a federal agency overseeing offshore drilling said May 1. The storms also damaged 457 pipelines connecting production facilities in the Gulf and bringing oil and natural gas to shore — a sharp rise from the 183 damaged pipelines identified in January, the Minerals Management Service said. Interruption of the Gulf supply has played a role in the recent round of record-high oil and gasoline prices. Officials have said that it is likely that as much as a fifth of the Gulf’s normal daily oil production of 140,000 barrels will still be off market when the next hurricane season begins on June 1. The MMS warned that additional damage likely would be discovered as more underwater inspections are conducted. “These have been delayed because of overwhelmed support resources, such as diving equipment, support vessels, and remotely operated vehicles,” said MMS Regional Director Chris Oynes. Of the 113 destroyed platforms, four replacements have been approved by the MMS. The agency said those will take the place of eight destroyed platforms with a pre-storm daily production of 16,700 barrels. MMS said six hurricane-related oil spills of at least 1,000 barrels were identified, the largest being 3,625 barrels. The spills did not impact shores or wildlife, the agency said. According to the latest MMS report issued on April 19, 22 percent of the region’s normal daily oil production and 13 percent of normal daily natural gas production remained blocked from market. —THE ASSOCIATED PRESS 18 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● OIL COMPANY EARNINGS ALASKA Earnings from Top 30 North American E&P Capex Spenders Earnings first quarter 2006 • Change from first quarter 2005 Liquids production first quarter 2006 • Change from first quarter 2005 PATRICK JUDY Natural gas production first quarter 2006 • Change from first quarter 2005

Company symbol earnings % liquids % gas %

BP BP $5,623 -15 2,533,000 -2 8,713 -0-

RD/Shell RDS-A $6,893 +3 1,966,000 –8 10,324 +5

EnCana ECA $1,474 -0- 212,941 -7 3,343 +6

ExxonMobil XOM $8,400 +7 2,696,000 +6 11,199 +11

Can. Natural CNQ.TO C$57 — 323,662 +13 1,436 -1

ConocoPhillips COP $3,291 +13 1,016,000* -3 3,565* +8 The ConocoPhillips Alaska-operated Alpine field averaged production of 125,548 bpd in April. El Paso EP

Chevron CVX $3,996 +49 1,681,000 +2 4,947 +32 Anadarko APC $661 +35 191,000 -10 1,366 -6 ANS oil production Devon DVN $700 +24 213,700 -19 2,125 -10

Dominion D $534 +25 67,800 +61 822 -4 Occidental OXY $1,230 +45 492,000 +15 708 +7 bounces back in April Husky HSE.TO C$524 +37 239,400 +16 685 +1 North Slope crude averages 824,357 bpd in April, up 7.3 % from Newfield NFX $149 +148 17,778 -30 493 -13

Petro-Canada PCZ C$206 +74 245,600 -13 787 -11 March, as BP reroutes Prudhoe Bay crude around corroded line

Kerr-McGee KMG $255 -28 106,000 -12 934 -7 By KRISTEN NELSON line. EOG EOG Petroleum News The ConocoPhillips Alaska-operated Nexen NXY.TO (C$79) — 122,900 -15 214 -14 Alpine field averaged production of laska North Slope crude oil produc- 125,548 bpd in April, down 0.9 percent Imperial IMO C$591 +50 263,000 +1 580 -1 tion bounced back in April after the from a March average of 126,665. Revenue Talisman TLM A steep drop in March following a said volumes were cut temporarily at Alpine Pioneer PXD Prudhoe Bay Gathering Center 2 oil April 8 to clean the shipping pump. spill, discovered March 2, which shut in Production dropped to 107,501 barrels that Apache APA $660 +18 230,191 -9 1,359 +8 some 100,000 barrels per day. day; production was 129,124 barrels April 1 Marathon MRO $784 +142 210,700 +29 996 -3 The Department of Revenue said that and 128,077 barrels April 30. Suncor SU.TO C$713 +964 269,600 +89 196 +3 beginning April 4 Prudhoe Bay operator BP BP’s Milne Point field had slightly Exploration (Alaska) partially restored flow Williams WMB $132 -34 714** +16 reduced production, averaging 41,628 bpd by diverting shut-in oil from the corroded in April, down 0.03 percent from a March Chesapeake CHK $624 +399 23,511 +21 1,378 +32 pipeline to an adjacent feeder pipeline. average of 41,640 bpd. Revenue said the Pogo PPP $67 +14 39,561 +29 282 +9 ANS production averaged 824,357 bpd field had a gas turbine failure April 1.

XTO XTO $467 +181 55,689 +21 1,126 +22 in April, up 7.3 percent from a March aver- Production dropped to 33,902 barrels that age of only 768,498 bpd, which was a 9 per- day. Forest FST cent drop from a February average of Murphy MUR $114 -0- 98,074 -10 84 -26 846,127 bpd. Northstar up 8% On a daily basis, ANS production was at BP’s Northstar field averaged 56,729 * Does not include share of Lukoil production 743,376 bpd April 1, climbed above the **Millions of cubic feet equivalent bpd in April, up 8 percent from a March Liquids production in barrels per day. Natural gas production in millions of cubic feet per day. 800,000 bpd mark April 7 and had several average of 52,527 bpd. Revenue said there days of production of 850,000 bpd by the NOTE: Top 30 is based on Petroleum News research was a complete plant shutdown at Northstar end of the month. April 20 due to emission testing with a pro- Prudhoe Bay production averaged duction loss of about 14,000 barrels. 374,855 bpd in April, up 17.7 percent from Production was 48,578 on that day; other a March average of 318,515, but still down than an April 1 production of 49,299 bar- from a February average of 400,383 bpd. rels, production from the field was in the The March figure was down 20.5 percent 50,000-plus barrel-per-day range through from February. Prudhoe Bay had April 1 the middle of the month and then, except for production of 303,727 bpd, had daily pro- April 20, production was above the 60,000 duction of more than 400,000 bpd twice bpd mark for the remainder of the month. during the month and was at 399,307 bpd The ConocoPhillips-operated Kuparuk April 30. River field (which includes West Sak, Prudhoe Bay production includes the Tabasco, Tarn, Meltwater and Palm) aver- Midnight Sun, Aurora, Polaris, Borealis and aged 176,065 bpd in April, up 2.5 percent Orion satellite fields. from a March average of 171,786 bpd. The BP-operated Endicott field (which Lisburne down 21% includes Sag Delta, Eider and Badami) BP-operated Lisburne (which includes averaged 19,731 bpd in April, up 1 percent Point McIntyre and Niakuk) averaged from a March average of 19,531 bpd. 29,801 bpd in April, down 21.2 percent The temperature at Pump Station 1 on from a March average of 37,834. Revenue the North Slope averaged 0.3 degrees said the 24-inch line between Lisburne and Fahrenheit in April, compared to a three- Point McIntyre was shut in April 13 due to year average of 3 degrees F for the month. corrosion and the Lisburne Production Cook Inlet production averaged 17,147 Center was on reduced rates of 20,000 bpd, bpd in April, down 1.1 percent from a and was sending volumes through a 14-inch March average of 17,341 bpd. ● PETROLEUM NEWS • WEEK OF MAY 7, 2006 19

● ANCHORAGE Felmy: Dispelling oil price myths American Petroleum Institute chief economist reviews the facts on oil prices, oil company profits and oil company investments

By ALAN BAILEY Department of the early 1980s when some small, ineffi- ethanol costs almost $4 per gallon, thus Petroleum News Energy forecasts of cient refineries were closed, after adding significant cost to fuel, Felmy continuing high President Reagan stopped the govern- said. ith escalating gasoline prices hit- crude oil prices ment subsidies for these facilities, Felmy The need for a massive increase in the ting people’s pocket books and oil result from continu- said. production of low sulfur diesel to meet a W companies reporting record prof- ing worldwide crude In the last 10 years we have seen refin- June 1, 2006, mandated requirement for its, phrases such as “windfall oil supply issues. ery capacity increases equivalent to 10 the production of this fuel is also a major profits tax” and “gasoline price controls” “Cambridge new state-of-the-art refineries, Felmy issue — production needs to go from have re-entered political dialogue. But Energy Research said. That has been a result of improve- about 109,000 barrels per day recently to what are the realities of the current oil says that there’s 2 JOHN FELMY ments to existing refineries — no new 2.4 million barrels per day by the June price situation and are the oil companies million barrels a day refineries have been built since 1976 deadline, Felmy said. really making excessive profits? production offline because of Nigeria, because of environmental restrictions and “We’ve got a lot of ramp up to do over At a special meeting of the Resource Iraq, Venezuela and so on,” Felmy said. other issues. the next four to five weeks,” he said. Development Council and the Alaska “There’s a very real … supply impact Support Industry Alliance in Anchorage going on at the same time as higher Do no harm Markets continue to drive prices on May 2 John Felmy, chief economist demand.” Felmy’s plea to government is “do no But crude oil supply and demand for the American Petroleum Institute, The high crude oil prices are clearly harm” and, instead, reduce barriers to issues in world markets will continue to went over some of the key issues relating benefiting oil production companies — development, streamline permitting drive oil and fuel prices. China is creating to the economics of oil in the United Felmy reviewed data showing oil compa- processes and so on. a high demand and there is the potential States. ny earnings in cents per dollar of sales “There is a whole range of things that for demand in India to start to escalate. compared with other companies. the government can do,” Felmy said. “We’ve got a real challenge in terms of Fuel costs However, integrated oil companies have “The key thing is let’s not repeat the mis- meeting petroleum demand worldwide,” Felmy started by displaying a graph not done as well as oil production compa- takes of the past.” Felmy said. showing that the prices of crude oil, gaso- nies, because of tight margins in the For example, Felmy recalled an oil Felmy also thinks that the push to have line and diesel fuel have all increased in downstream business. But, overall profits company windfall profit tax that the U.S. China revalue its currency might have the lock step during the past few years. That are not excessive — in terms of cents per government introduced in the 1980s. unintended consequence of pushing demonstrates the tight linkage between dollar of sales oil company profits are a “They drained $79 billion from the worldwide oil demand even higher — oil fuel costs and crude oil prices, Felmy bit above the average for all industries, industry, reduced production and is traded in U.S. dollars, so that an said. but not by all that much, Felmy said. increased imports for a classic failure,” increase in the value of the Chinese cur- “Consumers know what the price of “When we hear politicians say ‘this is Felmy said. rency would reduce the price of crude oil gasoline is … but they have no idea what excess profits,’ it’s utter nonsense,” he Felmy also dismissed ideas about gov- in China. goes into the price of gasoline,” Felmy said. “… Google, Citigroup, Goldman ernment gasoline price controls, in a situ- But Felmy is skeptical about theories said. Sachs and so on make a lot more than the ation where world crude oil prices drive that world oil production has peaked. “Yesterday ANS crude was around oil industry does, so the notion of a wind- gasoline prices and refineries are expen- “This notion seems to come around $71.97 (a barrel), or $1.71 a gallon,” he fall profits tax is simply wrong.” sive to operate. once every thirty years,” he said. “… said. Add in taxes of about 46 cents per And Felmy continued to slam ideas for But issues such as proposed tax They were wrong then and most likely gallon for tax and you arrive at a base fuel a windfall tax. How would raising indus- changes, the introduction of low sulfur wrong again … because these folks who cost of about $2.10 per gallon, before try costs through taxation help con- gasoline and the continued impact of hur- say that we’re running out don’t take into including cost factors such as refining sumers, he asked. He also commented ricane damage to oil refineries will pres- account the role of technology and global and transportation. that a windfall tax would hit hard-work- ent some challenges in the coming markets.” In fact, 55 percent of the cost of the ing Americans. months. Markets ensure continuing supplies, gasoline sold in the United States consists “These politicians also seem to talk as Current challenges also include man- Felmy said. Economists think that energy of the cost of crude oil; 26 percent of the though oil companies are owned by space dates to add ethanol to gasoline — on a cost goes to refining and distribution; and aliens,” he said. “… Oil companies are British thermal unit-equivalent basis, see FELMY page 20 19 percent consists of taxes, Felmy said. owned by millions of Americans who Oil companies make about an 8.5 percent invest their hard-earned savings in these margin from the refining and distribution, companies.” a figure that comes quite close to margins The people who are talking about this for U.S. industry as a whole. Even if you tax are the same people who have failed took out every penny of the earnings that to fix social security, Felmy said. But the industry makes throughout the entire retirement plans own a 41 percent stake supply chain, fuel prices would remain in oil companies, with private individuals high, Felmy said. holding 59 percent. The current above average gasoline “Even here in Alaska over 60,000 peo- and diesel inventories cause people to ple are part of state and local pension think that fuel prices should be lower, plans that are invested in the oil compa- Felmy said. But the inventories form a nies,” Felmy said. relatively small component of the overall In addition, the oil companies are supply chain and are really just designed investing vast amounts from their profits to keep supplies moving smoothly in new developments (including invest- through the system, he explained. ments in alternative energy sources), “If you have crude oil, you have to Felmy said. And the politicians who ask have a pipeline to keep it operating. You oil companies to invest more have also have to have tanks, so that the refinery withdrawn huge areas of federal land will not shut down,” Felmy said. “It’s from oil and gas exploration, he said. really more of a working inventory than Felmy also addressed accusations by anything else.” television commentators, among others, that the oil companies have been cutting Crude oil supply issues refinery capacities. Felmy went on to explain that U.S. “It is absolutely not true,” Felmy said. There was a cut in refinery capacity in continued from page 15 have a role,” Nanay said. “It’s a natural for them. They are right there in the DEVELOPMENT Barents Sea, and I think there are too many reasons to have them work togeth- constant uncertainties.” er.” Despite all the question marks in Nanay also believes Russia and Russia, Norwegian national oil company Norway ultimately will resolve their Statoil appears to be a leading candidate Barents Sea boundary dispute. “I don’t to participate in the Shtokman gas proj- know how or when, but it’s just too ect. important an area to leave undeveloped,” “I think the Norwegians are going to she said. ● 20 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● WASHINGTON, D.C. House approves oil price-gouging fine Rejects bill that supporters say would make it easier to build refineries in hopes of easing tight gasoline supplies, could come back

By H. JOSEF HEBERT Bush said last week he did not Associated Press Congressional Research Service releases think oil companies were engaging n May 3 the U.S. House approved ANWR report, says could generate billions in price gouging. He said May 3 criminal penalties and fines of up to A study by the Congressional Research Service of the federal revenues that could there is a “need to make sure our O $150 million for energy companies be produced from allowing oil and gas production facilities on just 2,000 acres of the consumers are treated fairly — caught price gouging, yet lawmak- 1002 area of the Arctic National Wildlife Refuge was recently released by Rep. that there is fairness in the ers acknowledged there is no quick and Richard Pombo, R-Calif., chairman of the U.S. House Committee on Resources. marketplace.” easy fix to higher pump prices. The April 27 memorandum from CRS concluded said there is a 50 percent chance President Bush summoned Democrats of recovering 10.3 billion barrels of oil from ANWR that would return $111 billion in chains could face civil penalties triple the and Republicans to the White House to new taxes if oil remains at $75 per barrel ($76 billion in income taxes and $35 billion amount of their unfair profit. Violators discuss legislation to address long-term in royalties). could go to jail. energy concerns. If oil drops to $60 per barrel, CRS said the revenue from taxes would decrease to Bush said last week he did not think “The price of gasoline should serve as $89 billion. If production increases to 16 billion barrels, tax revenue could reach $173 oil companies were engaging in price a wake-up call ... that we’ve got an ener- billion. gouging. He said May 3 there is a “need gy security problem and a national secu- The projections excluded “potentially large revenues from the development of nat- to make sure our consumers are treated rity problem and now is the time to deal ural gas, which is also estimated to exist in large quantities in the ANWR coastal plain fairly — that there is fairness in the mar- with it in a forceful way,” Bush said after . . . because there is currently no way to transport the gas to market (no pipeline).” ketplace.” the meeting. Pombo said in reaction to the study’s findings, “Congress should open ANWR, put The president, in talks with lawmak- With bipartisan support, the House ‘Big Oil’ to work increasing American supplies to lower prices, and generate massive ers, discussed proposals aimed at increas- approved on a 389-34 vote a measure that new tax revenues at the same time. How could tax-hungry Democrats say no to that?” ing and diversifying energy supplies, would create a price-gouging law and To access the CRS study, go to: extending tax credits for the purchase of permit large fines and jail time for viola- http://resourcescommittee.house.gov/issues/emr/anwr/memorandum_april_27.pdf hybrid cars and encouraging alternative tors. —PETROLEUM NEWS The Senate has yet to consider the leg- fuels. islation. “I don’t think there were any new pro- rules that require a simple majority for even by members of his own party. posals that had not been kicked around, Reject refinery bill approval. House Majority Leader Rep. John tried, talked about before,” said Domenici, R-N.M. The House did reject a Republican bill “There is not a panacea of short-term Boehner, R-Ohio, was quoted in press that supporters said would make it easier solutions to the (gasoline) price situation reports as saying, “I just think that trying today because it’s a demand-driven to satisfy voters with a $100 voucher is New rules for auto mileage to build refineries in hopes of easing tight requirements unlikely gasoline supplies. price,” Barton said at a news conference. insulting. Over the weekend, I heard All but 13 Democrats opposed the He said the government could set price about it from my constituents a few times. Also on May 3 the House Energy and measure, intended to quicken the permit- controls or release large amounts of oil They thought it was stupid.” Commerce Committee heard about the ting process. They said it would not bring from the U.S. emergency reserve. But he Also seeming to lose steam was a administration’s request for new rules for down gas prices, could lessen environ- opposes both ideas and said they would Democratic proposal for a 60-day “holi- auto mileage requirements. Automakers mental protection and usurp local say cause other problems. day” from the 18.4-cent per gallon feder- would gain flexibility in meeting per-gallon where refineries go. al tax on gasoline. standards for cars, but overall mileage Republicans branded Democrats as Frist’s $100 goes down in flames “We would like to be able to do some- would not necessarily rise. obstructionists on energy. The vote, 237- Senate Majority Leader Bill Frist’s thing now, quickly. The truth of the mat- Barton, the committee’s chairman, said 188, fell short of the two-thirds needed to proposal to give people a $100 rebate ter is we can’t,” Sen. Pete Domenici, he does not see Congress ordering higher pass under special procedures. checks – funds that were tied to future chairman of the Senate Energy and mileage requirements. “A Draconian Rep. Joe Barton, R-Texas, a leading revenues from drilling in the 1002 area of Natural Resources Committee, told increase would be a stake in the heart ... of supporter of the refinery bill, promised to the Arctic National Wildlife refuge — reporters after the White House meeting. the auto industry in this country,” he told bring it back, possibly next week, under was all but abandoned May 3, ridiculed The price-gouging issue seemed to reporters. have the most potential as a congression- According to a May 4 Boston Globe al show of support for people angered by report Barton said the only things that high gas prices. would reduce gas prices immediately were Under Rep. Heather Wilson’s bill, the government price controls or raiding the Federal Trade Commission and Justice Strategic Petroleum Reserve. Neither, he Department would have power over ener- said, were feasible. gy price gouging. Price controls would cause shortages, as During House debate, Rep. Sherwood they did in the 1970s, depleting the strategic Boehlert, R-N.Y., said, “American con- reserve, which would be a ‘”short-sighted” sumers are demanding protection from answer to a complicated, long-term prob- price gouging.” lem. Democrats echoed that sentiment. In late April Bush promised to stop gov- The legislation would direct the FTC ernment purchases of oil to add to the strate- to define price gouging. Violators could gic reserve, a move analysts said would face penalties of up to $150 million for reduce demand by only a small amount. refiners and other wholesalers and $2 Meanwhile, the Senate is shortly expect- million for retailers. The measure would ed to take up a measure to open the 1002 cover marketers of gasoline, diesel fuel, area of ANWR to oil and gas drilling, and to crude oil and heating fuel. increase capacity for oil refineries. ● Wholesalers and retail outlets such as —Petroleum News contributed to this corner gas stations and service station report

continued from page 19 everything is if you were to have a major outbreak of avian flu,” Felmy said. “It FELMY would shut down transportation. It would shut down a lot of commerce.” won’t run out but that prices will move But when it comes to understanding higher in response to shortages. On the oil and fuel prices, Felmy thinks that peo- other hand meeting projected increases in ple need to look at the markets rather than global crude oil demand will require mas- the machinations of oil companies. sive investment. People are always looking to attack the But is there any possibility of a fall in oil industry, he said, observing that this oil price? tendency seemed to go back to the days of There is a whole set of supply and John D. Rockefeller (and perhaps J.R. demand factors that play into this, Felmy Ewing). said. One possibility, for example, might “As an economist I tend to think that be a slowdown in the Chinese economy people either believe in conspiracy or — people are not sure how solid that markets,” Felmy said, adding that he economy is. firmly believes in markets. ● “The one big thing that would change PETROLEUM NEWS • WEEK OF MAY 7, 2006 21

● WASHINGTON, D.C. Soaring energy prices fuel takeovers Nationalization of Bolivian natural gas is part of a broader global wave souring investment climate for international companies The rebels threatening Nigeria’s oil infrastructure By BRAD FOSS Some analysts say energy-rich nations the Associated Press Business Writer have gained clout because of high oil prices, and ana- world over clearly have the upper hand now — lysts said they would not be surprised to see Angola try irst Russia. Then Venezuela. Now Bolivia. in contrast with the late 1990s, when oil traded to renegotiate some of its contracts with foreign oil Soaring energy prices are fueling a global wave at about $11 a barrel — and that it will be up companies. F of natural-resource nationalization that is souring to individual companies to decide if they can “When you start polling the world for where major the investment landscape for international oil com- live with less control over their foreign oil companies can do business, you have West Africa, panies and reshaping energy politics for years to come. Russia, the Middle East and Latin America. What they While it is anyone’s guess as to which energy-rich operations while getting less revenue per barrel. all share is that they’re becoming more and more diffi- developing nation will be next to assert greater state con- cult operating environments,” said A.G. Edwards oil trol over its oil or natural gas assets, analysts say it is analyst Bruce Lanni. Mobil Corp. and Royal Dutch Shell PLC, have already only a matter of time before the actions of Russia’s The European Commission said May 2 it would begun shifting their businesses in response to the chang- Vladimir Putin, Venezuela’s Hugo Chavez and Bolivia’s study the impact of Bolivia’s action on foreign ing landscape. He said multibillion-dollar investments in Evo Morales inspire a copycat. investors. Besides Brazil’s Petroleo Brasileiro SA, or Canada’s tar sands and Qatar’s natural gas reserves are “If you’re an international oil company and see this Petrobras, most of the biggest natural gas players in as much a reflection of the industry’s interest in these trend, it must be worrying,” said Yasser Elguindi, senior Bolivia are European, including Britain’s BG Group managing director at Medley Global Advisors in New projects as they are evidence of companies “investing in PLC and BP PLC; Spanish-Argentine Repsol YPF SA York. things they have access to.” and France’s Total SA. “If you gave oil companies a choice between the tar Analysts: trend should worry consumers sands in Canada or oil in Saudi Arabia, which do you Bush administration worried It should also be worrisome to energy consumers think they’d choose?” Elguindi said. For its part, the Bush administration said it was when global supplies are already extremely tight, ana- Some analysts say energy-rich nations the world over worried about U.S. corporate interests being trampled lysts said. They noted that non-OPEC oil production has clearly have the upper hand now — in contrast with the upon abroad, though it stopped short of any direct crit- not lived up to its potential since 2003, when Venezuelan late 1990s, when oil traded at about $11 a barrel — and icism of the Bolivian government. President Hugo Chavez began tightening his grip on that it will be up to individual companies to decide if Petroleos de Venezuela and, before that, Russian they can live with less control over their foreign opera- “When the issue of privatization does come up, or President Vladimir Putin jailed the ex-chief of Yukos, tions while getting less revenue per barrel. renegotiating contracts, certainly our concern is that paving the way for its prized assets to be acquired by For example, ExxonMobil chose to sell its stake in a any government meet or fulfill its contractual obliga- state-owned Rosneft. Venezuelan oil field rather than accept less desirable tions,” State Department spokesman Sean McCormack As a result, world oil markets were even more vul- financial terms. Many companies, including Chevron said. But McCormack would not say whether any con- nerable to supply disruptions stemming from violence in Corp., Royal Dutch Shell and BP, agreed to convert tracts had been violated because “we don’t have a Nigeria, war in Iraq and hurricanes in the Gulf of some of their Venezuelan oil-field contracts into state- complete picture of the situation.” Mexico. On May 2, crude futures shot up to almost $75 controlled joint ventures, betting that the ventures would What is known is that Morales ordered troops May a barrel as traders fretted about the possible outcome still be profitable even with a larger share of revenue 1 to surround 56 natural gas installations throughout from escalating tensions between the West and oil-rich going to the state. Bolivia, threatening to evict foreign companies that Iran over Tehran’s nuclear ambitions. Some analysts believe this approach will only did not give control over production to the nation’s “High prices have given all producing countries a lot embolden more countries to follow Venezuela’s lead, cash-strapped state-owned oil company, Yacimientos more leverage,” Elguindi said. arguing that the world’s largest private oil companies — Petroliferos Fiscales Bolivianos, or YPFB, within six From a pure energy-supply perspective, Bolivia’s with diplomatic support from Western governments — months. decision May 1 to threaten seizing natural-gas fields should resist being strong-armed out of existing con- Morales was elected late last year on a populist plat- from companies that refuse to renegotiate production tracts. form, promising to return to the country natural contracts will have little impact on the world stage. But “Either you hang together, or you surely will hang resources that had been “looted” by foreign compa- its symbolic significance cannot be understated, analysts one by one,” said Larry Goldstein, president of the nies. Bolivia has South America’s second-largest natu- said. Petroleum Industry Research Foundation, an industry- ral gas reserves after Venezuela, and is a critical sup- Coming on the heels of petroleum-sector power plays financed think tank. plier to Brazil and Argentina. by political leaders in Russia and Venezuela, the grip- “I’m not sure Bolivia is the end of this game,” said Daniel Yergin, chairman of Cambridge Energy tightening in Bolivia underscores the rising influence of Goldstein. Research Associates, said Morales’ action might be national oil companies and the increasing difficulty pri- expedient politically, but warned that it could backfire vate companies face as the world’s energy hunting Disputes in Ecuador, Chad, Nigeria down the road. grounds become less hospitable. Ecuador is arguing with Washington over a new oil “It will hardly promote the investment Bolivia royalties law. Last week, the World Bank tentatively needs to monetize its gas reserves,” Yergin said. Majors shifting business resolved a financial dispute with Chad, which had “Whatever the short-term gains, there will be long- Elguindi said major oil companies, such as Exxon threatened to shut off an oil pipeline. term costs.” ● 22 PETROLEUM NEWS • WEEK OF MAY 7, 2006

● JUNEAU Senate Resources gets Pt. Thomson update Menge says he could brief committee once gas contract released; would likely give Exxon extension until after gas decision By KRISTEN NELSON development. Menge believes it’s “reason- Petroleum News State of Alaska may partially subsidize able to assume” Exxon will request an extension. ommissioner of Natural Resources Point Thomson development “If they do nothing then we proceed for- Mike Menge told Senate Resources The day before Commissioner of Natural Resources Mike Menge appeared before ward and we have four options.” One C April 28 that he likely will give the Senate Resources committee (see adjacent story), the following Associated Press would be to “simply order the unit into pro- ExxonMobil an extension on the com- story broke. duction,” which “brings complications.” pany’s appeal of a decision from last fall’s Its headline was, “State may partially subsidize Point Thomson development.” Another is to find the unit in default and ini- Division of Oil and Gas decision finding It read: Alaska could partially subsidize development of the Point Thomson natu- tiate dissolution. Or, he could order the leas- the company in default of its Point ral gas field through oil-tax credits generated under a bill the Legislature is consider- es with certified wells into production. The Thomson unit obligations. ing, the governor’s petroleum consultant told lawmakers Saturday. fourth possibility would be to provide Menge said Point Thomson gas is a That’s a turnaround from the state’s position last year, when the Department of another extension. “critical” part of the gas pipeline — with Natural Resources’ Division of Oil and Gas found Point Thomson operator Sen. Ralph Seekins asked if an extension Prudhoe Bay still producing oil, he said, ExxonMobil in default for not developing the field itself and threatened to revoke its would benefit the people of Alaska. much of the initial gas for a pipeline project leases. Menge said an extension would give the would come from Point Thomson. Under Gov. Frank Murkowski’s net-profits tax bill, Exxon would be able to use tax legislature “time to evaluate” the proposed Resources Chair Tom Wagoner, R- credits on both oil investments and gas investments to develop the North Slope field gas contract between the administration and Kenai, said Menge had assured him that the and its 9 trillion cubic feet of gas, said consultant Pedro van Meurs. the three producers, BP, ConocoPhillips last extension Exxon received for Point The field has sat undeveloped for nearly 30 years and now figures prominently in and Exxon. Thomson – a six month extension — would negotiations between Murkowski and three oil companies, including Exxon, to build “If I took (back the) leases it would gen- be “the last extension they’d get and if they a $25 billion natural-gas pipeline to Canada and Midwestern markets. erate a cloud ... it could place the entire sys- didn’t comply there would be other action Before a fiscal contract for recovering North Slope gas and building a pipeline is tem in jeopardy. I would think long and taken.” released to the public, Murkowski says the Legislature must pass the net-profits tax hard about taking the decision away from Wagoner asked if there was an end in bill. The tax rates and credits will be rolled into the contract, which lawmakers will executive and legislative branch,” Menge sight. then have to ratify. said. Menge said he wasn’t going to try to Under the tax bill, Exxon would be able to claim credits for both oil and gas for Seekins asked if the legislature approved “sugarcoat” the situation. Point Thomson’s development. the gas contract, “at that point how long Next year, he said, would be the 30th would it take for Point Thomson to go into anniversary of the unitization of the still- development?” undeveloped Point Thomson field adjacent Point Thomson before they pull it from a balance. … I’m very sympathetic to the Gas could be pumped into a pipeline in to the Arctic National Wildlife Refuge on Prudhoe Bay, the other proved source of committee’s desire” to see Point Thomson “eight years or so,” Menge said, noting that the eastern North Slope. natural gas on the North Slope, Menge said. developed, he said. “hypothetically” he would consider an Point Thomson is a “critical part” of the He noted that Prudhoe Bay is still pro- Menge expects to make a decision on extension “until the legislature is done with gas pipeline because the three North Slope ducing oil and taking too much gas could Point Thomson by May 31 when the cur- considerations.” After that, he said, there is producers who want to build a gas pipeline reduce the amount of oil that can be recov- rent extension runs out. “no reason to continue along lines we have to Lower 48 markets want to take gas from ered. In the meantime, Exxon could ask for for 30 years.” ● “I have to try as commissioner to strike another extension or provide a new plan of

● PRINCE WILLIAM SOUND Group wants dispersants banned Prince William Sound Regional Citizens’ Advisory Council’s objective is to precipitate a change in industry, regulatory policy

PETROLEUM NEWS that dispersants could be used on an oil which bacterial action renders it harm- world-renowned authority on dispersants. he board of directors of the Prince spill as a last resort if mechanical recov- less. Dispersants require a considerable William Sound Regional Citizens’ ery efforts with booms and skimmers But, the council concluded, years of level of wave activity in order to work. T Advisory Council voted in early May proved ineffective. research have failed to bear out the claims Resurfacing refers to the fact that, if the to oppose any use of chemical dis- With this action, the council is now on of dispersant proponents. waves subside, the oil may un-disperse persants for responding to North Slope record as opposing dispersant use in the “Until such time as chemical disper- and return to the surface in an oil-disper- crude oil spills in Prince William Sound Exxon oil-spill region under any circum- sant effectiveness is demonstrated in our sant mixture that may be even harder to and other areas affected by the Exxon stances. region and shown to minimize adverse clean up than untreated oil, the council Valdez oil spill of 1989. effects on the environment, the council said. The action came May 3 in Valdez at a Prove it works does not support dispersant use as an oil After reviewing and analyzing the regular meeting of the board and was In theory, chemical dispersants do as spill response option,” the new position Fingas report, the council’s science com- taken at the recommendation of its their name implies: they disperse surface states. mittee concluded that resurfacing “has Scientific Advisory Committee and a oil into the water column, thereby dilut- “This puts the responsibility back not been well-defined or studied. A com- project team set up to examine the issue. ing it, preventing it from fouling shore- where it belongs,” said Connie Stephens, mon argument for the use of chemical Previously, the council position was lines, and speeding up the process by a board member from Valdez. “Until you dispersants is to keep oil off of environ- can prove to me it works, I don’t want it mentally sensitive areas. However, due to in there.” the potential of resurfacing, impacts can- The ban comes after the council has not be so well defined. Oil may simply spent years observing dispersant trials, resurface and impact another environ- reviewing dispersant research, and spon- mentally sensitive area.” soring independent research of its own. “No experimental or sea-trial evidence exists that indicates the common disper- Decision based on Fingas report sants stockpiled in Alaska will be very Most recently, the council commis- effective in combating Alaska North sioned a report called “Stability and Slope crude oil spilled in Prince William Resurfacing of Dispersed Oil,” by Dr. Sound,” the committee said in its summa- Merv Fingas, a Canadian scientist and see BAN page 23 PETROLEUM NEWS • WEEK OF MAY 7, 2006 23

● BOISE, IDAHO WASHINGTON, D.C. Kempthorne backed Bush pushes ANWR drilling; Stevens expects Bush to lift Bristol Bay ban President Bush talked forcefully about the need to drill for oil in the Arctic National sale of federal lands Wildlife Refuge during a meeting with members of Congress on May 4 according to Sen. Ted Stevens, R-Alaska. Bush asked the senators and representatives for a variety of measures to combat rising petroleum and energy prices. Stevens and 14 colleagues met with Bush for as U.S. Senator almost an hour. “I commented at length about ANWR myself, as a matter of fact,” Stevens told greater state control over federal lands, he By CHRISTOPHER SMITH Alaska reporters. endorsed similar federal land-sale proposals Associated Press Writer Stevens said he expects the U.S. House of Representatives will approve ANWR while serving as a U.S. Senator from Idaho drilling in the next week or two but he hasn’t seen any indication that the Senate would n the six weeks since he was nominated from 1992 to 1998. support the idea this year. as U.S. Secretary of Interior, Idaho Gov. Kempthorne sponsored an amendment The closest recent vote came Dec. 21, when 57 senators voted to stop a filibuster Dirk Kempthorne has sidestepped ques- to the Senate version of the fiscal 1999 I of a defense spending bill to which Stevens had attached an ANWR-drilling amend- tions about whether he backs President budget resolution that allowed proceeds ment. Drilling backers needed 60 votes in the Senate to overcome a filibuster and hold Bush’s proposal to sell off public lands to from the sale of public lands to be used to a vote on the bill itself. reduce the deficit and help rural schools. compensate private landowners for taking Of the 57 opponents of the filibuster, four were Democrats. Among the 43 sup- But he’ll have to break his silence May steps to conserve endangered species. His porters of the filibuster, two were Republicans. 5. Several members of the Senate Energy amendment reversed an earlier amendment Today, “there are at least two Democratic senators who are talking to us,” Stevens and Natural Resources Committee opposed that expressed the Senate’s objection to sell- said, in addition to the previous Democratic supporters. to the land sales are expected to grill ing off public lands to finance the federal Public pressure could create more supporters, he indicated. Recent polls show Kempthorne during his confirmation hear- landowner compensation program. growing support for drilling in ANWR, he said. ing on Capitol Hill. Kempthorne’s amendment passed the Stevens said ANWR oil can’t get to market in the short-term. But developing it “There are strong feelings about that Senate on a 55-43 vote. would combat higher prices in the longer-term, he said. proposal on both sides of the aisle and Two years earlier, he voted with the 57- The federal government’s Energy Information Administration has said that ANWR there’s no question it will come up during 41 majority to table an amendment to the oil is unlikely to affect gasoline prices much, though. That’s because the oil would rep- the hearing,” said Marnie Funk, press secre- Senate fiscal 1997-2002 budget resolution resent a small sliver of worldwide crude supply, which has averaged 84 million bar- tary to Sen. Pete Domenici, R-New Mexico, that would have restored a rule prohibiting rels per day this year. chairman of the panel that will later vote federal land sales to reduce the federal “They’re just misinformed,” Stevens said of the EIA’s forecast. whether to forward Kempthorne’s nomina- deficit. ANWR could produce a million barrels per day for 30 years, he said. “That’s a sig- tion to the Senate floor for confirmation. Idaho Republican Sen. Larry Craig said nificant amount of oil,” he said. “We think the sale proposals stinks, but that in his role as Idaho governor, Still, he said a few minutes later that the price of gasoline is mostly dependent upon we understand Governor Kempthorne has- Kempthorne would likely join Craig and crude oil prices, which in turn are “primarily set by foreign governments” that control n’t taken a position yet because he’s been a other Western lawmakers in opposing the the vast majority of world supplies. Right now, those foreign governments see that senator and knows how it works around Bush plan. But Craig, a member of the com- U.S. demand for gasoline has actually increased, despite record high prices, Stevens here,” adds Bill Wicker, spokesman to the mittee that will question Kempthorne May observed. ranking Democrat on the committee, Sen. 5, notes the governor won’t be representing “That’s a message to those foreign producers,” he said. Jeff Bingaman of New Mexico. “The quick- Idaho at the hearing. The senator said he also gave Bush a pitch for more oil drilling off Alaska’s conti- est way to get your head shot off is to start “Who is Dirk Kempthorne going to be at nental shelf, in the National Petroleum Reserve-Alaska and in Cook Inlet. talking like you are already confirmed.” the moment that question is asked, the gov- Stevens wants Bush to lift the administration’s policy against offering oil leases in Kempthorne is expected to support ernor of Idaho or the nominee of the presi- Bristol Bay, as well. Congress has already removed the statutory ban on such leases, Bush’s plan to sell 125,000 acres of Bureau dent? and Gov. Frank Murkowski has requested that Bush reverse the administration’s pol- of Land Management property and 300,000 Obviously, he’ll be the nominee,” Craig icy. Stevens said he expects Bush will do so. acres of national forest land to the highest said May 4. “He’s going to have to recon- bidder to raise money for the U.S. Treasury. cile his position with that of the president —THE ASSOCIATED PRESS Although as governor he has pushed for and I think that is doable.” ● continued from page 22 Citizens’ Advisory Council is an inde- pendent non-profit corporation whose BAN mission is to promote environmentally safe operation of the Valdez Marine ry of the Fingas report. (The report is Terminal and the oil tankers that use it. available on the council website at The council’s work is guided by the Oil www.pwsrcac.org/docs/d0026200.pdf.) Pollution Act of 1990, and its contract “Our objective in taking this action is with Alyeska Pipeline Service Co. The to precipitate a change in policy by indus- council’s 18 member organizations are try and the regulatory community by communities in the region affected by the which dispersant use would be removed 1989 Exxon Valdez oil spill, as well as from the toolbox indefinitely,” said Steve aquaculture, commercial fishing, envi- Lewis, a board member from Seldovia. ronmental, Native, recreation, and The Prince William Sound Regional tourism groups. ● 24 PETROLEUM NEWS • WEEK OF MAY 7, 2006 continued from page 1 make sure it finds any glitches in the bill all heavy oil isn’t the same, and as you go didn’t want to have to separate out capital before it moves, and said House Finance from the best heavy oil, at 25 degrees API costs for oil and capital costs for gas.” CREDITS members will be confident of the bill before gravity, down to oil at 10 degrees API, the Because there might be gas producers on it goes to the floor. cost of production goes up and the value of the North Slope not part of the gas fiscal cern from the administration’s consultant Asked if the governor would release the the oil goes down. contract, it’s important to make sure the PPT Pedro van Meurs on the 25 percent credit gas contract May 10 if PPT does not pass by Van Meurs said he looked very carefully law is good for gas and good for oil, van rate and from the Legislature’s consultant May 9, Coghill said that was an unknown, at a 25 percent credit rate, and “reluctantly” Meurs said. Tony Finizza speaking for Econ One on the although the expectation was that the gover- came to the conclusion that it wasn’t a good Rep. Beth Kerttula, D-Juneau, said she exclusion of two-thirds of natural gas from nor would release the contract on the 10th, idea because if you have high-cost low- was concerned that it was a “terrible risk” to taxation. which might change how the PPT is value oil, the opportunity for loss carry-for- have a higher tax and a higher credit for Timing issues for completion of work viewed. wards at low oil prices increases. both oil and gas, and said she believed the House Rules Chair Norm Rokeberg, R- “I came reluctantly to conclusion that state “can’t help but lose money” over the Members of the House’s Republican Anchorage, said that members of the leg- Alaska simply cannot afford such high tax long term. leadership addressed the issue of when PPT islative leadership have asked the governor credits,” van Meurs said. At prices of $34 or Van Meurs said credits for gas in the might pass the House in a May 1 press brief- for release of some of the fiscal terms, if not less a barrel there would be too much of a PPT, primarily upstream credits for Point ing. the whole contract. Enough, he said, that loss, he said. Thomson and development of some new House Majority Leader John Coghill, R- legislators could see whether some of the gas fields, have already been discounted in North Pole, said one issue around moving impacts of the PPT on gas would be neu- Progressivity, tax rate issues information presented to the Legislature. PPT was getting members who haven’t tralized by arrangements in the gas contract. On the progressive feature in the Senate Van Meurs said he understood the concern, been involved on a committee level familiar Rep. Hollis French, D-Anchorage, is CS van Meurs noted it has been defined but the credit part of the gas project has with the bill before it goes to the House suing to have the gas contract released and with oil prices in nominal dollars. If you already been presented and “there is no need floor; he said he planned a public walk- the judge’s decision is expected May 5. define the progressivity trigger — the point to fear additional credits against gas.” through of the final House Finance version at which a surcharge begins — in nominal Van Meurs said if it costs $2 billion to late May 4 or May 5. Since a committee Pedro van Meurs: 25% a concern terms, he said, without escalation, then the develop Point Thomson, the credit at 20 version had not yet been heard May 4, this Van Meurs said April 29 that the 25 per- value will erode over time as inflation con- percent would be $400 million. Roger public walkthrough would have to occur cent credit rate in the Senate CS is an issue tinues. The value of a starting point of $50 Marks already deducted that amount in pre- over the weekend or early the week of May that concerns him “deeply.” today could erode to $25 in real dollars of senting revenues from a proposed PPT, he 8. With the session ending May 9, PPT The governor’s proposal was for a 20 today in 30 years time. He cautioned legis- said. He also said Point Thomson facilities seems likely to be the subject of a special percent tax rate on net profits coupled with lators that if they included a progressive fea- will be partly for oil, since the field will gen- session, followed by consideration of the a 20 percent credit rate. ture they should look at the starting point erate condensate for oil production. The gas fiscal contract in a second special ses- Van Meurs said he recommended against “somewhat carefully.” belief was, he said, that it would be too com- sion. such a high tax credit, but hadn’t explained Van Meurs said he has testified on the plex to separate out what part of an invest- House Finance Co-Chair Kevin Meyer to the Legislature why. Before the PPT was relationship between competitiveness and ment should be charged to oil and what part said Finance Co-Chair Mike Chenault, who presented, he said, there was an extensive tax rate. He said his work has indicated that to gas. is taking the lead within the committee on analysis done on heavy oil because heavy “the higher the tax rate the less the Alaska Van Meurs said the original PPT had the the PPT, wants a good bill that people oil will be so important to the state in the system becomes competitive with other sys- same rate, 20 percent, for both oil and gas, understand. It’s a very complicated issue, future. tems in the world.” Level of activity and tax with the intention that the $73 million Meyer said, and Chenault wants to make In the analyses that were done economist rate go together, he said: the higher the tax allowance for small players would protect sure that it’s done right. Roger Marks of the Department of Revenue rate, the less attractive Alaska is at a given Cook Inlet. He said he thinks the Senate is Coghill said the time schedule is tight assumed that much more light oil might rate of credits. It may not matter if oil stays correct in its view that assuming the gas enough that the PPT realistically slips into become available, but van Meurs said his at $40-$50 a barrel, he said, but if oil com- contract goes forward, there may be North special session unless things fall into place assumption is that heavy oil is much more panies are looking at a long-term $35 price, Slope producers of gas who are not part of very nicely. To this point, he said, that has- important to the state and worldwide. and lower stress prices, then the tax rate the gas contract and the PPT has to be good n’t been true: it’s been a “very arduous At long-term prices of $35 a barrel 2 bil- matters. Alaska crude oil already has a net- for them. process.” lion to 5 billion barrels of heavy oil could be back $5 less than other crudes in the world, Meyer said House Finance wants to recoverable on the North Slope, he said. But he said, consequently if the tax rate goes up, Issue of downside “my prediction is that activity level goes Rep. Mike Kelly, R-Fairbanks, asked down.” about incorporating a floor in the PPT to Competitiveness studies were done on protect the state in the event of low oil light oil, he said: Alaska looks a lot less prices. competitive when studies are done on heavy Van Meurs said that was why he was so oil because of the greater importance of the concerned about the 25 percent tax credit: lower netback. when we did background on the PPT we And with Alaska production declining, modeled a minimum tax amount but didn’t the state needs to encourage more invest- recommend that because typically mini- ment, he said. mum taxes around the world are recover- able if the price goes back up, in other Senate separates gas tax words they are subject to a carry-forward Van Meurs liked the gross revenue provision, which makes them the equivalent exclusion for natural gas in the Senate CS, of an interest-free loan to the government and said it was very much in line with the during periods of low prices. international trend. With transportation While PPT would generate less at low costs for North Slope gas, ANS gas would prices, the present system of the severance have one of the lowest netbacks in the tax with its economic limit factor would be world. In nations faced with long-distance generating almost nothing 10 years out. shipment of gas to market, he said, most of Van Meurs said the second reason he those governments have decided their take doesn’t feel there is a need for a floor is that for gas should be less than for oil. The Alaska is “unusually well protected on the Senate concept is “in line with international downside” with its royalty system, property policies and competitive,” he said. tax and state corporate income tax based on Van Meurs got questions from Reps. worldwide taxes. If the netback becomes Reggie Joule, D-Kotzebue, and Bruce low in Alaska, he said, it wouldn’t necessar- Weyhrauch, R-Juneau, about treatment of ily be low internationally, so Alaska already gas in the PPT. He said the PPT bill had has better downside protection than most always applied to oil and gas, that there was never a plan to separate them because “we see CREDITS page 26 PETROLEUM NEWS • WEEK OF MAY 7, 2006 25

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CONTRACT The estimate is it will take about 10 Asked by Kelly about the provision in regimes. days to get through an analysis of the release the contract May 10, and Steve the Senate CS that would tax only one-third contract for the Legislature by the of the gross value of natural gas, Finizza Econ One: credit rate not a concern Porter, deputy director of the Department Department of Revenue and the gover- of Revenue provided more details, and said when he heard that he thought maybe Tony Finizza testified on behalf of the nor’s office; then the administration will someone had meant to say two-thirds. He Legislature’s consultant Econ One. said both the public and legislative offer to testify before the Legislative process for approval of the gas fiscal con- speculated that it might be an attempt to cor- He said concern over the credit rate has Budget and Audit Committee, he said. relate to something, perhaps Prudhoe Bay gotten a lot of attention, as has a range of tract would be initiated May 10. The public as well as legislators will The administration will be holding numbers under the current ELF, but he won- crude oil prices from $20 to $80 and a ten- be commenting and after the close of the dered what the goal was. dency to think all prices are equally likely. meetings in major communities to public comment period the commission- explain the contract and provide opportu- Looking at Point Thomson, he said he Finizza said the oil price distribution he has er of Revenue will have 30 days to thought the logical thing would be to put all presented is based on a mean or expected nities to comment, he said, and there will review all the public comments. Porter also be a Web-based system with access the capital against gas since oil is the value of $40 West Texas Intermediate, that that process would begin during the byproduct at Point Thomson, not gas. which seems equivalent to the $35 Alaska to the fiscal contract, all exhibits, the fis- comment period, and would include cal interest finding from the commission- Finizza said he didn’t think taxing only North Slope price van Meurs has used comments from the Legislature. one-third of the gas was workable and said because of quality and transportation issues. er of the Department of Revenue with He said the governor committed to attachments and references and a tem- he didn’t have another number to recom- There is no one view of the future, Finizza provide the contract on May 10, but mend. He said he didn’t feel he had a said: you could get $25 and could get $55, plate for the pipeline ownership contract, Porter said he did not know whether all along with contracts for ownership of the “magic silver bullet” on that issue, but said: but the “central tendency” is probably $40, three of the North Slope gas owners “a third doesn’t sound right; that’s not he said, noting that all economists have been treatment plant and lines coming into the would have signed off on the contract or treatment plant. right.” humbled by forecasting errors. Looking at not. Kelly also noted that the North Slope the Department of Energy’s forecasts what It is the responsibility of the governor First public meeting in Ketchikan might not be the only area where taxing is now their low case was their base case to provide a contract to the public that he only a third of the gas could be a problem. If Porter said the Municipal Advisory just two years ago: “A lot of people believe believes is the right contract, he said. It is they find 3 trillion cubic feet at Nenana, Council will be briefed on May 10. prices have moved up,” he said. up to industry to determine whether they that’s a different deal than if they find only Public meetings will start about a Finizza said he did some analysis on will sign it. enough to do something for Fairbanks. He week after the process begins to allow what a 25 percent credit rate would mean —KRISTEN NELSON said he thinks Alaska is big enough that people some time to review the informa- and concluded that for exploration plays the larger fields could be found, and said there state had about a 35 percent chance of a is a problem of going with something that negative tax due to a 20 percent credit rate, Alaska a “price play,” and if the state pro- changes in cost. tries to fit everything. so you could probably add another 5 percent Chenault said the goal in the Senate ver- at a 25 percent credit rate. It’s already “high- vides some incentive on the downside it He also suggested capping the progres- needs to leave some of the upside. He called sive tax rate. sion might have been a fix for gas in Cook ly risky” for exploration plays at 20 percent. Inlet or south of the Brooks Range, but said Finizza said he doesn’t think a 25 percent for a balance: oil companies do need some He stuck with the position Econ One has of the upside or they might not take any risk, taken in the past: that in the 20-25 percent he didn’t know what transpired when the credit rate does that much more damage. gas provision was put into the bill. The chance of the state having a negative he said. tax rate range there doesn’t seem to be a He said he thought $50 sounded about major change in investment. For a copy of Econ One’s report go to tax position for satellite developments is just http://www.akrepublicans.org/sen- 1 in 4 at the 20 percent credit rate, Finizza right as a trigger point for a progressive sur- He also said that he doesn’t think there is charge, but thought the nominal dollar trig- any doubt that higher tax rates produce res/24/pdfs/senres_sb305_50.pdf said, and drops to 5-6 percent for invest- Some pages were later revised. They can ments in legacy fields, so he didn’t think a ger could be a problem and might cause lower investment, but said he thought peo- producers to rethink investment. If costs rise ple were ignoring the effect of investment be found at 25 percent credit would add much risk. http://www.akrepublicans.org/senres/24/pdf There is natural protection for explo- in excess of inflation and prices rise at infla- rising as prices rise. tion, a progressive tax on a nominal trigger Finizza said Econ One believes there s/senres_sb305_78.pdf ration plans because at low prices, $20-$25, For Econ One’s draft Excel spreadsheet there wouldn’t be much exploration. could result in the state taxing an eroding will be more investment at today’s prices margin, Finizza said. under the PPT than under ELF at yester- that illustrates how the “progressivity on Balance needed on progressivity He said one solution was to index the day’s prices; the system plus the environ- net” mechanism works go to trigger to inflation or make it sensitive to ment, he said, should give us more http://www.akrepublicans.org/senres/24/pdf Finizza said producers have called s/senres_sb305_77.pdf ●

continued from page 1 else can and that is the essence of our dis- Enbridge: NPA too old barrel-per-day Keystone project “is the cussions.” quickest way of getting a significant Enbridge and the producers have coun- RIVALS If a deal is concluded between the pro- amount of new oil to market in the 2009- tered that so much time has passed since ducers and the Alaska government, 2010 timeframe.” that decision the pipeline should be re- Kvisle: producers will TransCanada will be eager to start “more He said there are “no other projects of opened for bidding and placed under the choose TransCanada urgent discussions … on how that gas that magnitude … that could get that jurisdiction of Canada’s National Energy would move through Canada,” Kvisle much oil into the market as quickly as we Speaking during and after his compa- Board, allowing a modern-day project to said. could.” ny’s annual meeting April 28, Kvisle said proceed. TransCanada and Enbridge have Enbridge is working on an even more ExxonMobil, BP and ConocoPhillips will The former Canadian government locked horns over who should regulate ambitious plan, starting with 400,000 bpd ultimately choose the TransCanada option under Prime Minister Paul Martin prom- and who should build the Canadian seg- of incremental volumes for its Southern for carrying their gas across Canada ised to clarify its position, but never had a ment of the Alaska gasline. Access system due to start service in because it has the most to offer. chance before it was defeated in January. Kvisle said the dispute has already 2009, followed by its 400,000 bpd He said five years of discussions have The new Conservative administration been decided in TransCanada’s favor Alberta Clipper pipeline that is now assured the Alaska producers that has only indicated it wants to settle unre- under the Northern Pipeline Act. before potential shippers for a response. TransCanada can get their gas to market solved matters facing the Mackenzie Gas Daniel reiterated in a May 3 confer- “more quickly and cheaper than anyone Project before dealing with the Alaska ence call what he said in a March inter- issue. view that Alberta Clipper will be the line Kvisle said he is worried that delays of choice for oil sands producers chasing and a long regulatory process that have markets in the Midwest. slowed the Mackenzie project could even “If you put the two side-by-side, we stop the C$7.5 billion undertaking. don’t think Keystone can stand up to He said Canada’s first attempt to open Clipper,” he said, arguing Clipper would up Arctic gas “hit a wall 25 years ago … gain a critical advantage by using a route and we have got to be prepared that that alongside Enbridge’s existing Canadian could happen again.” mainline right of way to produce “signif- TransCanada has a Memorandum of icantly lower tolls” and would, among Understanding with the State of Alaska to other things, provide a verity of products build the Alaska portion of the line, but and shipping options. Gov. Frank Murkowski has focused He told the conference call that instead on doing a deal with the North Clipper offers “significantly lower tolls.” Slope producers. Kvisle fired back that the right of way The races to ship oil is not a significant issue and “not a big deal at all” for the residents of North and On the race between TransCanada and South Dakota and Nebraska, where the Enbridge to ship more oil from Alberta to Keystone would be built. the Midwest, Kvisle said the “heartland of TransCanada has filed with regulators America” is the “most attractive long- in the U.S. and expects to take an appli- term for Canadian crude.” cation to the National Energy Board soon. And TransCanada’s planned 435,000 —GARY PARK PETROLEUM NEWS • WEEK OF MAY 7, 2006 27 continued from page 1 expenditure on energy represents a rela- tively small percentage of individual PRODUCTION household budgets, so that the impact of escalating prices is not as great as people And Herrera sees the dwindling likeli- tend to think. hood of finding more giant oil fields as a key Herrera also doesn’t believe that parameter in the production equation. increasing gasoline prices will have a “The giants which are the real feeders to major impact on people’s driving habits. world supply are simply a thing of the past,” He has recently returned from the United Herrera said. “So just on the basis of statis- Kingdom, where gasoline prices are much tics you have to be very, very concerned.” higher than in the United States. Uncertainty “UK gasoline today is $6.75 a gallon and you can find it for $7 a gallon if you However, Herrera commented on the want to,” Herrera said. “If you’re on a major uncertainties regarding future oil motorway it’s $10 a gallon. And is that discoveries. curbing demand then? Not at all.” “One has to be very cautious in estimat- ing guesses,” he said. Upward price pressure Herrera recalls many occasions when But what does the possibility of world geologists have made wildly inaccurate oil production passing its peak mean for oil predictions about potential oil discoveries. prices? He particularly remembers a conversation As the world population and the world around 1962 with Norman Falconer, the economy continue to expand, increasing then-chief geologist for BP. Falconer had demands for energy will continue to put spent a lifetime career in oil exploration upward pressure on oil prices, especially if and was a respected fellow of the Royal oil production has peaked, Herrera thinks. Society. “You have to be very, very concerned “‘What do you think of this North Sea about the continued and almost irre- business?’ Falconer said. ‘You know, Herrera, all these younger geologists are versible rise in the cost of energy for at telling me how much oil there is in the least a few decades,” he said. North Sea — I’m going to drink all the oil Nor does Herrera think that govern- they find in the North Sea.’ ments have any short-term options for alle- “Clearly he was dramatically wrong,” viating the situation. For example, he does Herrera said. Herrera also pointed out not think that pouring money into renew- some major uncertainties regarding the sta- able energy will provide a solution — tus of the giant oil fields in the Middle renewable energy sources just cannot pro- East, where there is a lack of hard data vide enough energy. about oil reserves and where information “There has been more money spent on published has more to do with politics than renewables than on nuclear or coal in the economics. past 10 years in this country,” Herrera said. Another issue is that it is not generally “And where are we now? Renewables are possible to recognize a production peak less than 1 percent of the total energy (sup- straight away. ply).” “I believe from just looking at history Not a crisis and peaking oil in individual countries that you inevitably don’t recognize the peak But Herrera does not see the current sit- until after it’s happened,” Herrera said. uation as a crisis. Even supposing that we So, if world oil has peaked it may take are at peak oil production, half of the a couple of years for data to indicate the hydrocarbons that the world started with production summit. Herrera also thinks are still in the ground. So, there will be a that the production of unconventional oil, gradual decline in production, rather than a such as heavy oil, is complicating the pic- sudden collapse over a production cliff. ture — rising oil prices have enabled an And that gradual decline will enable a increase in unconventional oil production. gradual adjustment to changing circum- “Unconventional oil is already playing stances. Faced with oil shortages and esca- a relatively major role,” Herrera said. lating energy prices, for example, people However, Herrera doesn’t see uncon- are likely to conserve more oil. ventional oil dramatically changing the sit- “The reality is that people will cope,” uation; it just makes forecasting oil pro- Herrera said. duction more difficult. But, although energy conservation is starting to happen in the United States, Supply and demand large-scale conservation would become a Herrera sees the current high oil prices big issue because of the way in which it as essentially a result of demand moving would impact people’s lifestyles. out of step with supply in oil markets. However, there is huge potential for ener- “I would argue that despite all the polit- gy savings. ical rhetoric … that what we’re going “That could carry America for through at the moment is purely supply decades,” Herrera said. and demand,” Herrera said. “… There is Herrera is very cautious about making more demand than there is supply and I predictions about future oil prices. Risk can’t really see anything geologically on factors associated with terrorism and polit- the horizon which is changing that supply ical instability in some parts of the world in any dramatically positive fashion.” have been pushing oil prices up. And the And Herrera sees the current furor over rapid growth of developing countries such oil and gasoline prices as having more to as China has had a major impact on oil do with politics and psychology than fac- demand and, hence, oil prices. But it is tual economics. very difficult to predict the worldwide pol- “In a way this is a huge psychological itics and economics that drive these issues. problem, rather than a real problem,” he “It really makes it a very confusing pic- said. “… The world is not falling apart.” ture,” Herrera said. He pointed out that current prices Although political change and unantici- haven’t even reached historic highs — in pated events in the world could certainly 1979 oil prices reached $80 per barrel in cause the price of oil to drop over short today’s dollars, he said. And there is no periods of time, Herrera sees long-term evidence that current $75 per barrel prices demand and supply trends continuing to are adversely impacting the U.S. economy. put upward pressure on oil prices. The statistics of U.S. work output for a “Unless we go into a huge world reces- given amount of energy indicate huge sion, those price reductions will be rela- improvements in efficiencies, thus reduc- tively temporary and inevitably it (the ing the drag on the economy resulting from price trend) is going to be upwards,” expensive energy, Herrera said. And Herrera said. ● 28 PETROLEUM NEWS • WEEK OF MAY 7, 2006

continued from page 1 including liquefied natural gas proposals that are as big or bigger than the CRUNCH Mackenzie proposal. The applicants want to do “everything tain production. we can to make the project go, but we Imperial spokesman Hart Searle told don’t want to do an uneconomic project,” Petroleum News new numbers are needed Searle said. “so that we can make an informed deci- Hearn urged regulators involved in the sion.” current parallel public hearings to facili- He was reluctant to discuss hypothetical tate their review without compromising options, but said the Mackenzie co-ventur- the integrity of the process. ers — Imperial, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada — Conservative government has would “do everything we can to make the budgeted C$500 million project go, but we won’t do an uneconomic project.” However, he said Canada’s new Imperial is almost Conservative government and the 70 percent owned by appointment of Jim Prentice as Indian ExxonMobil. In and Northern Affairs Minister give him Alaska, the producers hope that Arctic gas can be developed. looking at building a He said that except for Deputy Prime gas line from the Minister Anne McLellan the previous North Slope through Liberal government had done a poor job Canada to Lower 48 of managing the file. “It was embarrass- markets are BP, ing,” he said. ConocoPhillips and Tim Hearn, But Prentice is “very knowledgeable ExxonMobil. Imperial Oil and very active. … I think he gives every- body a fair degree of confidence,” by Single pipeline not yet revived tackling unresolved matters, including a tax and royalty regime. Hearn, speaking with reporters May 2, That view got a further lift May 2 and Searle said that looking at other ways when the federal government released its to connect the Arctic with southern mar- 2006-07 budget and delivered on a kets did not yet include reviving earlier Liberal promise to provide C$500 million talk of delivering Mackenzie Delta and over 10 years to cover the social and eco- North Slope gas into a single pipeline. nomic impact of the Mackenzie pipeline. When the Arctic proposals resurfaced Northwest Territories Premier Joe in the 1990s there was talk of building an Handley said the fund my help conclude “over-the-top” pipeline from the North access and benefits negotiations between Slope, under the Beaufort Sea and linking Imperial and first nations. up with a Mackenzie Valley pipeline, or Without the fund, he would have been building a Dempster Highway lateral in “very concerned about the message (from Canada to connect with an overland Ottawa) to aboriginal leaders.” Alaska pipeline in the Yukon. Handley is more certain than ever that “Linking up with Alaska gas is not the Mackenzie pipeline will proceed really part of our focus,” Searle said. because of the need for new gas supplies. He said the Mackenzie economics have been challenging from the outset Dene Tha’ take opposition to court and have been amplified because of the demands on construction materials and Hearn did not make specific reference labor at a time when Canada is unable to to the various regulatory obstacles, which handle every major project that has been ratcheted up May 2 when the Dene Tha’ announced. of northern Alberta decided to take their In addition, Searle said there are the opposition to the pipeline to the Federal costs of infrastructure, such as airstrips Court of Canada, arguing they have not and roads; the costs of participating in been fully consulted. year-long public hearings and meeting The first nation has stepped up its whatever regulatory conditions might be complaints recently, concentrating on the imposed; and the market outlook for gas impact of oil and gas development on that will be produced over 25 years. what they consider traditional land. He said Mackenzie gas has to compete Dene Tha’ Chief James Ahnassary told with other gas projects in North America, the Canadian Broadcasting Corp. a pipeline would drive a 100-yard wide right of way across northern Alberta, adding to a network of seismic lines, pipelines, roads and leases. However, he places low odds on his community of 2,500 succeeding when the court hearing starts in June. Dene Tha’ residents estimate that 350 oil and gas wells in their region have already damaged the environment and reduced animal populations that are caught for food and fur. In addition to the Dene Tha’s case and the continuing refusal of the Deh Cho First Nations to become a partner in the venture, the Mackenzie proponents face a National Energy Board hearing that could start June 2 when six independent Mackenzie Delta/Beaufort Sea explorers ask the board to take regulatory control over the Mackenzie’s gas-gathering and mainline systems. Meanwhile, a joint review panel assessing the potential social and envi- ronmental consequences of a pipeline has scrapped planned hearings in Edmonton and Calgary in June. The panel said a “lack of expressed interest” in the only hearings planned for south of the Northwest Territories and Yukon has forced it to use June 6 and 7 for extra sessions in Hay River, NWT. ●