BP budgets more than a billion dollars for Alaska projects

by Eric Lidji

BP is budgeting $ 1.2 bn in capital expenditures for Alaska in 2009, a 33 % increase from current year spending, according to the outgoing president of the local subsidiary. But the company also expects a 10 % drop in drilling at Prudhoe Bay 2009.
The figures came nearly a year to the day after Alaska lawmakers revised the state production tax code in November 2007, increasing the tax rate but also expanding exploration credits. But they also come amid global financial uncertainty responsible for slashing oil prices to below $ 45 a barrel, down from their peak of $ 144 a barrel in July.

While both factors will certainly contribute to oil company investment in Alaska over the coming year, the exact nature of cause and effect is difficult to predict. BP blamed tax changes for a shrunken budget in 2008, but ended up overspending during the year.
Speaking at the annual conference of the Resource Development Council in Anchorage on Nov. 19, outgoing BP Exploration (Alaska) President Doug Suttles said both factors played a role as the company decided which projects would receive funding in 2008.
"Some of those are no longer attractive in today's market conditions, under today's cost structure and also under today's tax structure," Suttles said.

Even though oil prices have only returned to 2005 levels, Suttles said "the profit potential at $ 50" is less than it was even three years ago. He said costs have increased 15 to 20 % per year, while taxation around the world has become more onerous for industry.
In addition to BP, the two-day conference featured presentations from ConocoPhillips, ENI, StatoilHydro, Anadarko, Pioneer Natural Resources, Chevron and Exxon, as well as a host of officials speaking on topics related to resource development in the north.

Several deferred projects
It can be difficult to verify if business decisions stem directly from a single source, be it tax changes or low commodity prices, but Suttles said "current conditions" prompted BP to defer construction projects in western Prudhoe Bay in 2008, including $ 1 bn toward I Pad and other regional projects, and a $ 120 mm gas partial processing plant.
As proposed, I Pad would tap viscous and light oil resources in the western region of Prudhoe Bay, while the processing plant at nearby Z Pad would receive "three-phase" production of oil-gas-water from four surrounding pads -- Z, W, L and V -- and separate out some of the gas to enhance oil recovery on the west side of Prudhoe Bay.

In announcing the 2008 capital budget in January, Suttles said BP planned to spend $ 800 mm in capital expenses for Alaska in 2008, a 16.7 % increase from the 2007 budget, but $ 100 mm less than the company planned to invest before the tax. But on Nov. 19, Suttles said BP ultimately invested $ 900 mm in Alaska in 2008.
The discrepancy comes from unexpected costs, not an increase in projects, according to BP spokesman Steve Rinehart.
"A couple of things happened this year [2008] that we didn't exactly anticipate," Rinehart said. "One was the investment in Denali. The other was the cost increase of the transit line project."

Denali is a proposed gas pipeline joint venture between BP and ConocoPhillips. The two companies are spending $ 600 mm to bring the project to an open season by 2010.
The transit line project involves repairing and replacing corroded infrastructure responsible for a large spill and a subsequent shutdown of operations at Prudhoe Bay in 2006.

$ 400 mm for new projects
Of the $ 1.2 bn proposed for 2009, Rinehart said roughly a third would be split among four projects: developing the offshore Liberty prospect, continued testing of heavy oil production methods, advancing Denali and a new effort to develop Point Thomson. The Liberty project will require the longest wells ever drilled and the most powerful rig ever built. Because it sits in federal waters, Liberty isn't subject to state production taxes.
The Point Thomson project recently received a blowwhen the state refused to issue ice-road permits to ExxonMobil, the unit operator. Point Thomson remains in litigation on several fronts. Rinehart said BP hopes to negotiate, and would wait to "re-evaluate" its 2009 budget until the matter reaches a more conclusive point of resolution. The remaining $ 800 mm of the proposed capital budget would go toward "all the stuff you do," Rinehart said, referring to regular North Slope development drilling.

Suttles said half the North Slope production by 2013 will come from investments into existing fields made over the next five years, but in the company's "current forecast under current conditions," BP expects to drill roughly 10 % fewer infill wells in 2009 than the 80 to 90 wells the company is drilling before the end of 2008. Following a successful production test from the Ugnu formation this summer, BP intends to drill three new test wells in the Milne Point area in the attempt to produce heavy oil.
Suttles suggested BP needed state cooperation to bring heavy oil to fruition, but said the company planned to "progress these efforts and these technologies even in a $ 50 world."

Suttles: "Gas is not enough"
BP believes throughput on the trans-Alaska oil pipeline will drop to 200,000 bpd by 2020 at current rates of decline. Suttles said pumping more from existing fields, unlocking the estimated 20 bn barrels of heavy oil, and developing new prospects will still be necessary for industry and the state, even with commercial gas sales.
With prices at $ 10.50 per tcf of gas, a pipeline carrying 4 bn cfpd in 2025 would only yield half the revenues collected through state royalties and production taxes on existing oil production at $ 100 per barrel, Suttles estimated.
"Gas is not enough," he said. "We have to do more than just move forward with a gas pipeline."

Renewing old infrastructure
In addition to continued development of existing fields, a significant chunk of capital spending for BP will continue to go toward renewing aging North Slope infrastructure, pieces of which are nearly 35 years old. Of the $ 900 mm BP spent in Alaska in 2008, more than 20 % went toward projects to renew existing infrastructure.
"We need to invest massive amounts of money in renewing the infrastructure on the North Slope. These same facilities are the facilities that are going to be required for our next 50-year future, so we must continue to invest in these," Suttles said.

Suttles is leaving Alaska to become chief operating officer for BP's global exploration and production business. John Minge, currently the president of BP Indonesia and head of BP's Asia Pacific unit, will take over as president of BP Exploration (Alaska) at the start of 2009.
Suttles began his current post in Alaska in January 2007.