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Alaska gives ConocoPhillips a shot at drilling prized oil prospect

Alaska officials will allow ConocoPhillips to expand an existing North Slope oil field into an area near big discoveries, but only if it agrees to development steps that include drilling a well by June and possibly paying the state millions of dollars.

The payments total $7 million if ConocoPhillips plans to bring the new leases into production in the coming years. They are meant to replace revenue that Alaska might have made had it auctioned the Tofkat area in a competitive lease sale.

ConocoPhillips could also lose the Tofkat-area leases if it accepts the state's terms and does not drill in time, according to the 21-page decision, issued Tuesday by Natural Resources Commissioner Andy Mack. The area encompasses about 9,000 acres a few miles northeast of Nuiqsut village, extending south from ConocoPhillips' existing Colville River Unit.

The top objective is getting the area into production safely so the state can collect a royalty portion of the oil produced, Mack said in an interview Friday.

"The area around the Colville Delta continues to impress the state as the most likely area where new production can come online in the near future," Mack said.

The stakes at the prospect are high, suggesting it could attract significant income if the state offered it to bidding companies in a lease sale. But doing so could also restart the clock on development, leading to delays in a state that desperately wants more oil production to help close a $2.5 billion deficit. Oil taxes and the sale of royalty oil make up most of the state's revenue.

ConocoPhillips has sought to expand into the new area, saying it can develop it quickly if it's part of the Colville River Unit. But ConocoPhillips has already twice failed to drill it as the state expected, once in 2002 and again this year. ConocoPhillips has said the delay this year came after the nearby Nuiqsut residents sought a slower pace of development.

Mack said this new decision will protect Nuiqsut, the state and other organizations in the area, including the Arctic Slope Regional Corp., a Native regional corporation that owns the land with the state.

Natalie Lowman, a ConocoPhillips spokeswoman, said Thursday the company is reviewing Mack's decision. The company has until Aug. 14 to accept the terms.

Oil independent Brooks Range Petroleum Corp. discovered oil there in 2008 but was also unable to develop it. The prospect is potentially linked geologically to what may be a giant oil field heralded since 2015 by Denver-based Armstrong Oil and Gas and Spanish oil major Repsol.

Bill Armstrong, president of Armstrong Oil, said on Friday that Tofkat is "directly in line with and between" his company's discoveries at its Pikka field and at Armstrong's wildcat well drilled this past winter to the south, called Horseshoe.

The companies have said the Pikka field could produce up to 120,000 barrels of oil daily. But it might be bigger than originally thought, potentially extending south to Tofkat and Horseshoe.

Armstrong said the Tofkat "acreage should be very productive" in the Nanushuk formation, where oil was found at Pikka. The Nanushuk is relatively shallow and little explored. North Slope oil companies for decades targeted deeper prospects.

Armstrong and Repsol want the Tofkat area, but development by ConocoPhillips will be good for Alaska, Native corporations and others, Armstrong said.

"Armstrong/Repsol would love to have the lands but we already have a big chunk of this new field and it is rare when one company owns it all," he said in a text.

The Tofkat acreage is located near the western edge of oil development on the North Slope. ConocoPhillips snatched up significant chunks of land there in a federal lease sale held in December.

The guidelines set by Mack also include an incentive to hire Alaska and North Slope workers.

Joint landowner ASRC, representing North Slope shareholders, must also approve the Colville unit expansion. ASRC has indicated it supports the expansion, but must issue a formal decision, Mack wrote.

"This decision was a long time coming," said Ty Hardt, a spokesman with ASRC. "Now that it's been made, ASRC will focus on discussing any potential concerns with our shareholders and residents in Nuiqsut."

If development occurs, the state and ASRC would each get a piece of the royalty — 16.67 percent of the oil produced.

Mack said ConocoPhillips has a strong track record with development in the region.

About 15 miles northwest of Tofkat, ConocoPhillip's CD5 operation began producing oil in late 2015. The field is yielding 26,000 barrels of oil daily, better than the original estimate of 16,000, Lowman said.

ConocoPhillips in January announced the large Willow discovery about 30 miles west of Tofkat, on federal land. ConocoPhillips says it could produce up to 100,000 barrels of oil daily.

"This is definitely the best path forward for the state," said Mack. "Hopefully, this will lead to drilling that gives us a lot of information about what's there."

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