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The state of Alaska is facing a difficult decision, with reduced
oil prices and oil production negatively impacting revenue for
local government. Up for vote this November was Alaska Ballot
Measure 1, which would have increased taxes on numerous oil
producers in the state. While this would have increased revenue for
the government, it would have also deterred investment dollars from
operators going forward. As winter approaches, activity is
beginning to ramp up in preparation for the winter season on the
North Slope of Alaska. When ice begins to cover the terrain, these
isolated areas become more easily accessible, allowing more
development and exploration drilling to take place. ConocoPhillips,
the basin leader, and a large group of small independents are
gearing up for exploration and development activity throughout the
basin. As successful exploration continues, new source volumes and
commissioning of recoverable resources currently under appraisal or
development will serve to maintain production levels above the
volumetric lower threshold for the Trans-Alaska Pipeline System
(TAPS) export infrastructure, thereby extending the operational
life of the North Slope.
The 2020-21 exploration drilling season is shaping up to be
another slow year compared to pre-2020 activity. 88 Energy (through
its wholly owned subsidiary Accumulate Energy Alaska) is aiming to
drill two wells at its Project Peregrine in the National Petroleum
Reserve—Alaska (NPR-A), where it recently acquired the assets
of XCD Energy. The company has started the permitting process at
its Merlin and Harrier prospects, targeting the prospective
Nanushuk interval. Drilling operations are set to begin in the
first quarter of 2021, pending the outcome of farmout discussions.
Pantheon Resources (through Great Bear Petroleum which it acquired
in 2019) has applied for the creation of the Talitha Unit along the
Dalton Highway 23 miles southwest of the town of Deadhorse, where
it plans to drill the Talitha A well down to the base of the
Kuparuk sand. The operator has reportedly been looking for a
partner to share the financial risk of its North Slope portfolio.
Delay in securing a partner may affect the projected February 2021
spud date for the well. Pantheon has also applied for the creation
of the Alkaid Unit about three miles to the north, where it will
construct a driveway and pad suitable for year-round activity. The
company plans to spud the Alakaid 2 well in the third quarter of
2021, which will penetrate the entire Brookian section and include
a 10,000 ft lateral. ConocoPhillips, whose 2019-20 exploration
campaign of seven wells was cut short to only three wells due to
the collapse in oil prices precipitated by the COVID-19 pandemic,
has not yet announced if it plans to resume its program in
2020-21.
Figure 1: Drilling activity over previous 10 years in
Alaska
The successful 2019-20 drilling season serves as a backdrop for
upcoming activity. Oil Search made two discoveries near its
operated Pikka field and Horseshoe block. East of Pikka, in the
company's Quokka area, the operator drilled Mitquq 1 and the Mitquq
1 sidetrack, where it discovered oil and gas pay in the Nanushuk
and Alpine intervals. While Oil Search has not yet publicly issued
reserves estimates for Quokka, pre-drill resource estimates ranged
from 200 MMbbl to 500 MMbbl with the development concept being a
tie-back to infrastructure at Pikka. West of Horseshoe, the Stirrup
1 well intersected oil pay in the Nanushuk reservoir. Pre-drill
resource estimates ranged from 200 MMbbl to 400 MMbbl, with Oil
Search having previously stated that a successful outcome there
could de-risk additional fairways that could lead to a stand-alone
development. ConocoPhillips also made a discovery in the Nanushuk
interval at the Harpoon prospect in the NPR-A but provided no
further details. Pre-drill resource estimates at Harpoon ranged
from 400 MMbbl to 750 MMbbl. Harpoon is located southwest of the
company's Nanushuk development at the Willow field, where
ConocoPhillips drilled two successful delineation wells during the
recently concluded drilling season. The company expects to reach a
final investment decision (FID) for Willow in 2021 with first oil
planned for 2025-26. Expected peak production is 160,000 b/d, with
cumulative production of roughly about 590 MMbbl over the 30-year
life of the field.
The Alaska North Slope basin upstream operations are technically
and economically challenging because of remote locations, limited
infrastructure and difficult access routes. Exploration activity
began in the basin in 1945, however, commercial development was
delayed until commissioning of the 2 MMbbl/d TAPS export pipeline
in 1975. Peak liquids production was last reached in 1988 and since
has been in decline, falling to around 420,000 bbl/d in 2019.
Volumes from currently producing assets are projected to threaten
the TAPS minimum operating threshold of 250,000-300,000 bbl/d,
jeopardizing the operation of Alaska's sole export route for
liquids production. New source volumes from discovered, undeveloped
resources have the potential to revitalize the basin, delivering a
projected 1 MMbbl/d of incremental production by 2038 through the
development of 26 assets expected to reach initial production over
2020-45. However, this outlook is subject to two material
uncertainties. First, is the ability of key operators to secure the
financial partners necessary to proceed with these development
projects—a concern for most projects outside of those being
developed by basin leader ConocoPhillips. Second is growing
environmental opposition to exploration in the basin and in the
NPR-A and the Coastal Area of the ANWR. Companies being aware and
focused on ESG (environmental, social, and governance) issues has
never been more important than our current era. One example of how
ESG impacts Alaska is the drilling season never commences on a set
date. Operators are required to wait until the terrain is
sufficiently frozen before mobilizing completely, as pre-mature
movement over the terrain could damage foliage for the summer
months, thus negatively impacting the environment.
Figure 2:Production from already producing projects,
relative to TAPS capacity and threshold
The importance of developing new projects along the North Slope
cannot be understated. It is our prediction that production will
hit critically low levels in the 2025-2030 range if new projects
are not brought online. If production were to be permanently
shut-in during 2025, it would lead to approximately US$ 10 billion
in after-tax cash flow and over US$ 30 billion in government
revenue being lost over the life of the producing projects. These
numbers amount to almost an entire year of Alaska's current GDP and
grow significantly when we include lost revenue from new projects
that would be stranded. Certain Alaskan government officials
attempted to offset the declining revenue for the state by
implementing Alaska Ballot Measure 1, which was up for vote this
November 3rd. The initiative would have increased taxes on some of
the largest producing fields in Alaska, such as Prudhoe Bay and
Kuparuk. Looking strictly at the financial contributions towards
the bill in the state finance reports, it is clear the majority
(more than 90%) did not want this bill to move forward. It appears
their efforts have been successful, as the bill did not pass, with
100% of precincts reporting and almost 65% of votes opposing the
bill.
Figure 3:Government revenue with and without new
developments along the North Slope
According to Alaska's state website, nearly 85% of the state's
budget is supplied by oil revenue, further highlighting the
importance of the North Slope assets. The value of producing
projects relies on fresh field production to keep from pre-maturely
shutting in. The new projects which require dedicated production
facility have a break-even oil price at or below US$ 30 in some
cases, while new projects that will be incorporated into existing
facilities have break-even oil prices under US$ 20 at times. This
allows these assets to be competitive on a global scale, while
ultimately reversing the dwindling production in the region.
Successful development of the assets will help generate just under
US$ 5 billion annually for the Alaska government on average from
2025-2040, critical for a region dependent on oil and gas revenues
to maintain its existing standards of living. This revenue
represents over 300% increase from current levels.
Isaac Nuti is a Senior Technical Research Analyst II at
IHS Markit. George Laguros is a Senior Technical Research
Analyst II at IHS Markit. Angelina Belyayevskaya is a Technical Research
Principal at IHS Markit. Fernanda Machado is a Research and Analysis
Associate Director at IHS Markit.
