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ConocoPhillips will boost drilling at newly producing NPR-A site

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published April 21, 2016

ConocoPhillips Alaska has won the corporate approval and funding needed to boost drilling and potentially produce more oil at a newly developed site in the nation's largest oil reserve.

The company had originally received approval to drill 15 wells at its CD5 site in the 23-million-acre National Petroleum Reserve-Alaska, on the western flank of the state's North Slope oil fields.

But oil production that began last fall – the first commercial oil to flow from the nearly century-old reserve -- quickly exceeded expectations.

Now, the company plans to expand the site to its "full design and permit capacity," a plan that calls for an additional 18 wells, the company announced Thursday. That could boost the total number of wells at CD5 to 33.

The work to build the infrastructure associated with the expansion will begin this year. First oil from the additional drilling is expected to begin flowing in the third quarter of 2017, the company said in a media statement issued Thursday morning.

The company has not projected the amount of additional oil production that will come from the additional wells, an official said.

Joe Marushack, president of ConocoPhillips Alaska, said the extra effort should result in more oil at the larger Alpine field that CD5 is linked to.

"The additional drilling opportunities we've identified at CD5 are a positive development that should increase oil production at Alpine," Marushack said.

The announcement comes at a time of widespread layoffs across the North Slope, with oil companies shuttering rigs and exploration plans in an effort to weather a sharp downturn in oil prices that began in the summer of 2014.

There's also been a sharp debate in the state's capital as lawmakers consider scaling back the state's oil production tax system, which became effective in 2014, to help reduce the state's $4 billion deficit.

ConocoPhillips said the current tax system was a factor in the decision and made the CD5 project more "competitive" compared to other opportunities around the world. The company has kept capital spending in Alaska relatively stable, and has said estimated capital costs in 2016 will fall slightly below $1.3 billion.

The new work at CD5 will cost $190 million, and will come atop the $1.1 billion it took to access and build CD5, an effort that included construction of a 1,405-foot bridge, one of the state's largest spans, across a channel of the Colville River.

Some of the oil produced at CD5 is eligible to be classified as "new oil," a designation under state law that essentially offers generous production tax rates at fields where oil began flowing in 2008 or later.

The designation was created to encourage new development. It allows companies to avoid paying production taxes until the price of oil jumps to about $73 a barrel, according to an analysis by the state Tax Division. North Slope crude sold for $42.42 a barrel on Tuesday, and the state expects prices to remain below $73 for at least a decade.

ConocoPhillips will not pursue a "new oil" classification for oil produced from CD5. The company has determined that at CD5, it's too costly to implement the state's metering requirements associated with "new oil," said Natalie Lowman, communications director for ConocoPhillips Alaska.

The metering requirements help the state to keep track of oil from a newly producing area, versus oil from an older area.

CD5 is an extension of Alpine, a large field that began production in 2000. Its location near the original Alpine development creates challenges related to parsing "new oil" from the rest of the oil produced at Alpine.

Without a "new oil" designation, the oil at CD5 will be treated as other petroleum produced on the North Slope, subject to a 4 percent gross tax at today's low oil prices, though tax credits can allow that rate to be reduced to zero.

The CD5 site is located on Native-owned lands within the reserve. The state is expected to receive royalty shares from some of the produced oil, including half of the federal government's 16.5 percent share of oil produced from federal lands.

The state, in its latest revenue forecast, estimates that rents, royalties and bonuses in NPR-A will be $4.3 million this fiscal year.

In February, ConocoPhillips Alaska said CD5 had already met its estimated peak daily production of 16,000 barrels, after it had drilled eight of the 15 original planned wells, officials said.

On Thursday, the company said 10 wells have now been drilled at CD5, while the field will meet an average production of 16,000 barrels daily this year.

The company said it is also ordering materials for a new field in NPR-A known as Greater Mooses Tooth 1. There, first production is expected in late 2018. Peak production at that field is estimated at 30,000 barrels of oil daily.

ConocoPhillips expects that oil produced from Greater Mooses Tooth 1, a $900 million project, will be classified as "new oil," unlike the oil from CD5, said Lowman.

GMT1 is eight miles southwest of CD5, deeper into the reserve and farther from the original Alpine infrastructure. The site's remoteness presents less complications with separating "new oil" from other oil produced at Alpine.

ConocoPhillips holds a 78 percent interest in both fields, with Anadarko Petroleum holding 22 percent.

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