Vol. 16, No. 9 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of February 27, 2011 • $2

� F I N A N C E & E C O N O M Y

� N A T U R A L G A S

� E X P L O R A T I O N & P R O D U C T I O N

Q&A: House Speaker Mike Chenaultwants action on both AGIA and ACES

page3

The February issue of North of 60 Mining News is enclosed

February Mining News inside

CPAI 2011 capex upConocoPhillips budgeting $900M for Alaska this year, increase over 2010

By ERIC LIDJIFor Petroleum News

ConocoPhillips is proposing a $900 millioncapital budget for Alaska this year.

The Houston-based major spent $730 million inAlaska in 2010, according to annual filingsreleased by the U.S. Securities and ExchangeCommission on Feb. 24.

When it comes to the majors, capital budgetsoffer only a sense of what a company is planningfor the year and rarely match up exactly, or evenclosely, with actual spending.

For instance, ConocoPhillips spent $730 mil-lion in Alaska in 2010, but budgeted $854 millionfor the year. For 2008, ConocoPhillips budgeted $1billion, but spent $1.4 billion.

That said, the 2011 budget is higher than anyproposed for Alaska in the past five years except2008, a time of rising oil prices and a record-breaking Chukchi Sea lease sale.

ConocoPhillips said spending in Alaska “isexpected to be directed toward development of theexisting Prudhoe Bay and Kuparuk Fields, as wellas the Western North Slope.”

When it comes to the majors, capitalbudgets offer only a sense of what a

company is planning for the year andrarely match up exactly, or even closely,

with actual spending.

see CONOCO CAPEX page 12

MGP’s outlook cloudedFile assigned to new cabinet minister; project founders; interest in LNG exports

By GARY PARKFor Petroleum News

With no fanfare and no formality, CanadianPrime Minister Stephen Harper handed

federal cabinet oversight of the Mackenzie GasProject to newly appointed Indian and NorthernAffairs Minister John Duncan.

Meanwhile, interested parties wait for the cabi-net to decide whether to give its final stamp ofapproval to the National Energy Board’s Dec. 16ruling in favor of the project.

The project’s lead partner Imperial Oil and theAboriginal Pipeline Group, which has an option toacquire a one-third equity stake in the Mackenziepipeline, were not informed of Duncan’s new role.

Previously the job was held by former environ-ment ministers Jim Prentice and John Baird, butfor reasons that haven’t been explained, the newenvironment minister Peter Kent was bypassed.

While the waiting game continues for theMGP, the pace continues to pick up

around the Kitimat LNG project, addingto a view that future gas production fromnortheastern British Columbia poses thebiggest threat to the economic prospects

for Arctic gas development.

see MGP OUTLOOK page 17

Looking for Susitna gasDNR turns its attention to researching the Susitna basin resource potential

By ALAN BAILEYPetroleum News

The Susitna Valley, a huge, low-lying area ofmuskeg, lakes and rivers to the north of

Anchorage in Southcentral Alaska, is perhaps bestknown as a destination for wilderness salmon fishingand as the location for the first day or so of the annu-al Iditarod sled dog race. But with known coal seamsin the sedimentary basin that lies underneath the val-ley, could this region immediately to the west of theAlaska Railroad route and close to the state’s highwaysystem become a new source of much-needed naturalgas for the Alaska Railbelt?

Alaska’s Division of Geological and Geophysical

see SUSITNA GAS page 18

Independents: There are ways to stem declining oil flow in line

The declining flow of crude in the trans-Alaska oilpipeline could be stemmed, independent companies operat-ing in the state said Feb. 18, and illustrated to the HouseResources Committee two ways that could happen.

AVCG, Brooks Range Petroleum Corp. and Great BearPetroleum LLC, testifying in favor of the governor’s propos-al to increase investment by reducing oil taxes, House Bill110, discussed two ways increased volumes of oil could beincreased.

AVCG LLC, formed in 2000, is the holding company forBrooks Range Petroleum Corp. BRPC was established as the

Rumors of Agrium plant to Africa;Itta sheds anti-development stance

IS THE AGRIUM FERTILIZER PLANT on the KenaiPeninsula headed for Nigeria?

That strange question began circulatingaround the oil patch after Dave Harbour, aformer Regulatory Commission of Alaskacommissioner, posted a report from HeavyLift & Project Forwarding International onhis long-running blog Northern GasPipelines.

According to the report, Fairstar HeavyTransport NV, a Dutch shipping company,recently “signed a Letter of Intent to pro-vide a total land and marine logistics solu-tion to transport 115 modules as well as related equipment

see OIL FLOW page 19

see INSIDER page 19

MICHAEL BURKE PHOTO

Shawn Ryan examines a rock fragment on the WhiteGold Property in west-central Yukon Territory wherehe discovered a sizable gold anomaly in 2007 using asoil sampling technique that he developed to explorethe wooded terrain bordering the historic Klondikeplacer gold fields.

A special supplement to Petroleum NewsWEEK OF

February 27, 2011

A special supplement to Petroleum News

4 Exploring for tomorrow’s resources Roundup: B.C., Alaska, Yukon tout $700M exploration; 2011 poised to top $1B

10 Pact signals start of NWT devolution Territory believes control of resources will lead to Yukon-like success

21 Mining heats up on Prince of WalesState seeks synergies among advancing REE, VMS projects on SE Alaska isle

2 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

contents Petroleum News North America’s source for oil and gas news

LAND & LEASING

EXPLORATION & PRODUCTION

ENVIRONMENT & SAFETY

PIPELINES & DOWNSTREAM

NATURAL GAS

FINANCE & ECONOMY

11 Thawing permafrost to accelerate warming

12 NMFS to hold hearings over seal listings

15 USCG admiral warns about Arctic needs

12 Buccaneer Alaska promotes Rike to EVP

12 Benefits of Alaska OCS development cited

14 Unocal pursues Forest for $48 million14 RCA extends CPAI ‘10 tariff another year

15 Alberta government backs Edmonton area upgrader

11 Judge orders Interior to move quickly

14 Clipping the EAB wings

15 Escopeta ship headed for Gulf of Mexico

4 BOEMRE publishes Beaufort fish survey

5 State cites Macondo, Slope spills study

5 Potential Alaska state and federal oil and gas lease sales

GOVERNMENT

10 Libya drives oil prices to almost $100

Saudi Arabia says it has spare production capacity,if needed; International Energy Agency would also step in to offset shortfalls

3 House Speaker pushes against AGIA, ACES

Chenault concerned about state wasting money on TransCanada project; wants recognition Alaska not competitive environment

9 Big picture the goal with new NPR-A plan

Some areas already deferred for 10 years as moreinformation collected; Native, environmental,industry interests all at play

8 Alyeska answers federal pipeline critic

Barrett says operator of trans-Alaska pipeline is on top of challenges associated with declining oil flow; talks begin with PHMSA

6 Jan. shutdown puts TAPS close to brink

Alyeska executives describe efforts to prevent freezing in pipeline after pump station oil leak in era of low oil throughput

7 FNG to offer new interruptible service

New rate class would allow utility to expand saleswithout expanding capacity, would make natural gas available to more customerst

4 BC government offering fresh batch of incentives

ON THE COVERCPAI 2011 capex up

ConocoPhillips budgeting $900M for Alaska this year, increase over 2010

MGP’s outlook clouded

File assigned to new cabinet minister; project founders; interest in LNG exports

Looking for Susitna gas

DNR turns its attention to researching the Susitna basin resource potential

Independents: There are ways to stem declining oil flow in line

OIL PATCH INSIDER1 Rumors of Agrium plant to Africa

19 Itta sheds anti-development stance

By STEVEN QUINNFor Petroleum News

House Speaker Mike Chenault wantssome answers.

The Nikiski Republican wants toknow whether a large-diameter naturalgas pipeline is economical and whetherit’s time to put a on the shelf.

He wants to know whether the state iswasting money backing a project byTransCanada, supported under theAlaska Gasline Inducement Act.

He’s hoping House Bill 142, whichsets a midsummer deadline for about theprojects economic viability, will producesome guidance.

Chenault also wants to know whenenough people will realize that Alaskahas not provided a competitive environ-ment for the oil industry.

He’s looking to his col-leagues, industry execu-tives even former execu-tives during a recent trip toWashington, D.C., foranswers.

A few days after returning, Chenaultsat down with Petroleum News to dis-cuss concerns ranging from oil taxes, thegas pipeline and declining throughput inthe trans-Alaska oil pipeline.

Petroleum News: What can you reallylearn about the project that doesn’tinfringe on federal laws outlined byFERC?

Chenault: We don’t know. We thinkthe DOR and the DNR commissionersshould serve as a conduit for the projectand give us some kind of status informa-tion update. We realize there is informa-tion that we can’t get. But the governoris asking us for $160 million for thisyear. All the indications we are receivingfrom sources not only internally but allover the U.S. is that we are awash in nat-ural gas. The price is in the $3.80 range.Certainly that could change if the Feds,the EPA or states stepped in and said weare not going to allow fracking in thesebig coal seams.

We don’t know that. We would like toget some information where we canmake a rational decision based on factsnot what we think might happen.

I think it’s imperative that we as astate Legislature know some informationso we can decide what the future ofAlaska is going to be.

According to the AGIA contract, evenif they have a failed open season,TransCanada, they have to move forwardtoward a FERC certificate.

With the Legislature being the appro-priating body, we have some concerns, isthat a good expenditure of state funds?

Petroleum News: If TransCanada hadnot failed to meet its self-imposed dead-line to release certain details from openseason, would you still feel this way?

Chenault: I’ve looked back at someother big projects and the timelines onhow long it took for them from the timethey went to an open season till the timeopen season closed to the time they actu-ally went into construction. Some ofthose timelines are relatively short.

There are a lot of moving pieces outthere. One of the bigger pieces I believeis gas tax certainty. But gas tax certaintyis not an issue TransCanada can negoti-ate for the State of Alaska. The

Legislature and thegovernor will haveto negotiate withany of the producersif and when anyproject is put for-ward.

They promised adate certain, but youcan’t hold them tothat. Six months onan open season, from my look at a cou-ple of other projects along the U.S. isquite a bit longer. We all understand thisis a big project — a mega project, what-ever term they want to use this week.Take The Rockies Express (Wyoming toOhio). It was bid in three different sec-tions, three different bids, which is whythe timeframe from open season to con-struction was four and a half years.

Petroleum News: So willyou bring this to the tablewhen House Finance hearsyour bill?

Chenault: As I saidbefore, HB 142 is not intended to kill theAGIA process. It’s intended to gatherinformation for the Legislature to makessure we are spending the dollars we havewisely.

Petroleum News: TransCanada toldWall Street analysts they believe there isstill a market for Alaska’s natural gas inaddition to shale and Mackenzie gas. Doyou believe there is a market outside ofthe state for North Slope gas?

Chenault: I don’t know if it’s a prof-itable market or not. It’s going to dependon tariffs, on contracts that are signed,on cost of the gas at the wellhead. If youwant to sell your gas at a breakevenpoint or just a little more then there isprobably a market. If you want to give itaway there is always a market for it. Inthe U.S. there are a number of areasactively looking to export their gas ver-sus two years ago when we were build-ing LNG receiving facilities to take natu-ral gas from the other parts world. That’sjust how drastic the world changes.

Petroleum News: Have you had achance to review a report by RogerMarks who concluded money for an in-state line could be better spent on alarge-diameter line?

Chenault: It’s not surprising whatRoger Marks had to say. I look at thatissue is that if you’re not going to buildthe line for 20 years, what does Alaskado? What does Alaska do for energy inthe state? What do you do for jobs? Howdo you grow the economy for the state ofAlaska? You can’t do it waiting 20 yearson a natural gas pipeline that may ormay not happen. I look at the LNGexport facility that shut down and I lookat the Agrium facility shut down (both inCook Inlet). Could we have made anydifference? I can’t tell you that we couldhave. But what I can tell you is that if wecontinue to not make decisions whilewaiting on a big project to come thatmay never come, then we are doing adisservice to Alaskans.

Petroleum News: Did you meet with

any energy officials while you were inWashington?

Chenault: We had a speaker, JohnHofmeister (former Shell President). Hegave a good talk, an analysis of energyissues across the U.S. and world distribu-tion of oil and gas. He talked about howunder the current administration wearen’t making any investment in the U.S.We shut down the Gulf of Mexico; weshut down all offshore drilling anywhere;we are systematically depriving our-selves of oil exploration and gas in ourown country. He felt in the near futurewe will hit $5 a gallon gas. He’s tryingto tell us that unless we start developingour own resources. We are going to beleft behind, and not only are we notgoing be able to get those resources fromother areas.

Petroleum News: Why is there nosense of urgency?

Chenault: I think it’s the environmen-

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 3

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� G O V E R N M E N T

House Speaker pushes against AGIA, ACESChenault concerned about state wasting money on TransCanada project; wants recognition Alaska not competitive environment

MIKE CHENAULT

see CHENAULT Q&A page 17

4 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

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� F I N A N C E & E C O N O M Y

BC government offering fresh batch of incentives

By GARY PARKFor Petroleum News

British Columbia is winding down itscurrent fiscal year with barely half the

forecast revenues from natural gas, one ofits key revenue sources.

Instead of bemoaning its fate, the gov-ernment has done what has worked in thepast by offering a fresh bundle of incentivesto stimulate upstream investment.

But the decline in its gas revenues, at atime of shrinking exploration and develop-ment activity and stubbornly low commod-ity prices in a saturated North Americanmarket, is staggering.

Finance Minister Colin Hansen dis-closed that the 2010-11 budget year isexpected to end on March 31 with gas roy-alties of C$365 million, compared with theoriginal forecast of C$698 million.

His budget predicted only a modestrecovery over the next three fiscal years toC$497 million in 2011-12, then C$597 mil-lion and C$865 million — a combined totalthat is still short of the C$2.3 billion rakedin five years ago.

Tax breaks, royalty creditThe government responded as it has in

the past by doing what has won it strongbacking from the industry.

Energy Minister Steve Thomson rolledout C$120 million in tax breaks for compa-nies who build extraction infrastructure,adding to a royalty credit program that wasintroduced in 2004 that offered creditsworth half the value of pipelines and roads.

The objective is to open up remote areasin northeastern British Columbia’s prolific,but costly-to-operate gas fields by buildinginfrastructure now for when a recoverytakes place.

Thomson told the Vancouver Sun it is“more crucial than ever” to encourageindustry activity by setting the stage forlong-term development and generatingjobs, activity and revenue.

David Pryce, vice president of opera-tions with the Canadian Association ofPetroleum Producers, endorsed the govern-ment strategy by suggesting that withoutincentives the revenue streams would behave been “considerably less.”

“It’s about the competitiveness of ajurisdiction,” he said.

Gary Leach, executive director of theSmall Explorers and Producers Associationof Canada, said the decline in royaltiessends a message to policymakers about theimportance of their role in ensuring “a sta-ble, attractive investment climate” especial-ly during a period of low commodityprices.

However, Thomson implied that the pro-gram is not a giveaway by noting that onlyprojects offering the “highest economicbenefits” will be approved.

Goal incremental gas royaltiesThe government’s goal is to earn C$2.50

in incremental gas royalties for every C$1in credits.

It estimated that under existing pro-grams it has seen 76 new roads and 91pipeline projects completed at a capital costof C$1 billion.

But there is no denying that Canada’ssecond largest gas-producing province afterAlberta at about 1.17 trillion cubic feet ayear, or 20 percent of the national output, isfacing the same tough times as its peers.

Despite the anticipated turnaround inrevenues, average plant inlet gas prices areforecast to recover only gradually fromC$2.71 per gigajoule in the current year toa successive C$3.02, then C$3.60 andC$4.20.

Hansen forecast B.C.’s overall budgetdeficit for 2010-11 will drop to C$1.3 bil-lion, down C$400 million from the budgetforecast, and continue sliding to C$925million in the upcoming year and eventual-ly regain a surplus in 2013-14.

While the province posted economicgrowth of 3.1 percent in calendar 2010, itexpects only 2 percent in 2011, reflectingthe Ministry of Finance’s expected slow-ing in global activity. �

Contact Gary Park through publisher@petroleumnews.com

It estimated that under existingprograms it has seen 76 new roadsand 91 pipeline projects completed

at a capital cost of C$1 billion.

GOVERNMENTBOEMRE publishes Beaufort fish survey

The Bureau of Ocean Energy Management, Regulation and Enforcement hasreleased the results of a comprehensive study of fish populations in the westernBeaufort Sea, the agency announced Feb. 18. The survey will provide baselinedata for measuring future changes in the fish populations in response to factorssuch as climate change and industrialactivity, BOEMRE said.

The study involved the measurement ofwater depths and water salinity, as well asthe collection of samples of fish and inver-tebrates.

“Our comprehensive offshore energystrategy calls for increased environmentalstudies off the coast of Alaska,” saidBOEMRE Director Michael Bromwich. “The results of this study will contributegreatly to our knowledge of the fish populations in the Beaufort Sea. When com-bined with the other scientific work we are conducting in the region, this studywill enable us to make better decisions regarding responsible offshore energydevelopment in Alaska.”

BOEMRE says that the study involved an interagency agreement betweenBOEMRE and the National Oceanic and Atmospheric Administration and is thefirst of a series of anticipated interagency studies of the diversity and distributionof Beaufort Sea fish populations. A similar study to the one now completed willbe carried out in the central Beaufort Sea in the summer of 2011, through anagreement with the University of Alaska Fairbanks’ School of Fisheries andOcean Sciences, BOEMRE said.

—ALAN BAILEY

The study involved themeasurement of water depthsand water salinity, as well asthe collection of samples of

fish and invertebrates.

By KRISTEN NELSONPetroleum News

T he State of Alaska has signaled thatit expects changes in how oil and

gas operations are conducted in Alaska asa result of the Deepwater Horizon disas-ter in the Gulf of Mexico last year and theAlaska Department of EnvironmentalConservation’s risk assessment.

In decisions of substantial new infor-mation for the state’s 2011 AlaskaPeninsula and Cook Inlet areawide leasesales and for Susitna basin explorationlicenses, Commissioner Dan Sullivan ofthe Alaska Department of NaturalResources ruled in early February that“the Deepwater Horizon incident consti-tutes substantial new information thatjustifies supplements to the most recentbest interest findings” along with reportsout from ADEC on the Alaska RiskAssessment.

An investigation of the DeepwaterHorizon, a federal investigation by theU.S. Coast Guard and the Bureau ofOcean Energy Management, Regulationand Enforcement, and a state investiga-tion by the Alaska Oil and GasConservation Commission, are ongoing.And there are reports out from the ADECproject assessing risk of oil and gas infra-structure in Alaska, the Alaska RiskAssessment. The North Slope SpillsAnalysis was completed late last year,compiling and analyzing causal informa-tion associated with specific North Slopepipelines and providing recommenda-tions on mitigation measures to reducefuture spills, including seven specificrecommendations for reducing the risk offuture loss-of-integrity spills from NorthSlope infrastructure. The oversight reportproduced as a result of the ARA Projectprovides the State of Alaska with practi-cal recommendations for future oversightactivities for oil transportation.

Licensee advisoryThe commissioner said that while

review of the risk assessment reports isongoing, some of the recommendationsare within the jurisdiction of DNR’sDivision of Oil and Gas and “within thescope of lease mitigation measures.”

“For the NSSA Report, although itfocuses on pipelines regulated by ADECon the North Slope, the recommenda-tions from the expert panel have someapplicability to all agencies that provideoversight of the oil and gas industry inAlaska. Broadly, the recommendationssuggest that the state engage industrymore proactively by requiring industry toprovide information on how systemsintegrity is being managed, reviewingthat information for understanding andcompleteness, collecting appropriate datathat can be used to determine root cause,and increasing enforcement,” Sullivansaid.

The commissioner said “it is verylikely that additional mitigation measuresor other statutory or regulatory require-ments will be implemented within thenext year,” and an advisory has beenadded to the best interest findings.

The licensee advisory says that inlight of the review and evaluation ofinformation from the Deepwater Horizoninvestigations and the ADEC risk assess-ment reports and a determination ofwhich information and recommendationsare applicable to Alaska, “new or modi-fied mitigation measures, lessee advi-sories, or other statutory or regulatoryrequirements addressing issues such assafety, environmental safeguards, riskmanagement, and reporting standardsmay be forthcoming.”

The Alaska Oil and Gas ConservationCommission has a public hearing sched-uled for May 11 on whether changes oradditions may be needed to its regula-tions governing drilling, rig workoverand well control in offshore and ultra-extended reach wells.

The commission gave notice last Junethat following the issuance of the Reportto the President from the NationalCommission on the BP DeepwaterHorizon Oil Spill and Offshore Drillingthat it would convene a public hearing toreview and assess the adequacy ofAlaska’s relevant statutes and regula-tions; the National Commission issued itsreport Jan. 11. �

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 5

LAND & LEASING

This week’s lease sale chartsponsored by:

Geokinetics

Potential Alaska state and federal oil and gas lease sales

Agency Sale and Area Proposed Date

DNR Alaska Peninsula Areawide May 25, 2011

DNR Cook Inlet Areawide May 25, 2011

DNR Beaufort Sea Areawide October 2011

DNR North Slope Areawide October 2011

DNR North Slope Foothills Areawide October 2011

BOEM Sale 219 Cook Inlet 2011*

Agency key: BLM, U.S. Department of the Interior’s Bureau of Land Management, manages leasing inthe National Petroleum Reserve-Alaska; BOEM, U.S. Department of the Interior’s Bureau of Ocean

Energy Management, Regulation and Enforcement (formerly Minerals Management Service), Alaskaregion outer continental shelf office, manages sales in federal waters offshore Alaska; DNR, Alaska

Department of Natural Resources, Division of Oil and Gas, manages state oil and gas lease sales onshoreand in state waters; MHT, Alaska Mental Health Trust Land Office, manages sales on trust lands.

*The OCS Cook Inlet sales are subject to industry interest. All other remaining Alaska sales on the2007-12 schedule were cancelled.

� G O V E R N M E N T

State cites Macondo,Slope spills studyDNR commissioner finds substantial new information for AlaskaPeninsula, Cook Inlet areawide sales, Susitna exploration license

Contact Kristen Nelson at knelson@petroleumnews.com

By ALAN BAILEYPetroleum News

I n many ways the central artery of theAlaska economy, the trans-Alaska

pipeline carries about 11 percent of U.S.domestic crude oil production. But a shut-down of the pipeline in January followingan oil leak at Pump Station 1 on the NorthSlope dramatically illustrated the growingrisk of a major pipeline outage, as decliningpipeline throughput allows the temperaturesof the fluids flowing down the line to dropto lower and lower levels in the winter.

“I was closer to the edge of the cliff thatI didn’t want to go over, and I don’t thinkAlaskans want to go over,” Tom Barrett,president and CEO of Alyeska PipelineService Co., told the Alaska HouseResources Committee on Feb. 17 whenrecounting how an army of Alyeskaemployees and contractors had swung intoaction, preventing water from freezing inthe line following the Jan. 8 oil spill inci-

dent. Alyeska operates thepipeline on behalf of the pipelineowners.

Declining throughputThe essential problem that

Alyeska faces is that, withpipeline throughput decliningfrom a peak of about 2.1 millionbarrels per day in 1988 to630,000 barrels per day recently,it now takes 15 days for the oil to travelfrom the North Slope to the tanker terminalin Valdez. The oil cools as it travels downthe line, with the potential for water in theoil to freeze out as ice, blocking the move-ment of pigs — the devices used to scrapeclean the inside walls of the line — andpotentially damaging valves and otherpipeline equipment.

When the leak was discovered in abooster pump building at the northern endof the pipeline on Jan. 8, Alyeska promptlyshut the entire pipeline down while person-

nel investigated what had hap-pened and formulated a plan todeal with the situation.

But at the time of the shut-down the oil temperature was just36 F in a section of the pipelineknown as “the bowl,” in the areaof the Yukon River, Alyeska OilMovements Director BetsyHaines told the committee. Andwith one pig in the line in the

bowl section and another in the line nearGlennallen, there was a real risk of one ofthose pigs becoming frozen in place, thuscausing a huge problem in restarting theline.

Immediate responseRealizing the urgency of the situation

and recognizing that unpredictable andchanging weather conditions could impactthe response effort, Alyeska put a majorresponse into action as quickly as possible,Barrett said.

“You move immediately as far and asfast as you can,” he said. “If you get behindon the response curve you may never beable to catch up.”

Normally Alyeska carries out pipelineshutdowns in the summer, when the oil inthe line remains relatively warm. And thecompany plans those shutdowns in detail,months in advance, rather than at amoment’s notice.

On this occasion, with an almost imme-diate cessation of flow through the line andwith oil continuing to flow into storagetanks at Pump Station 1, the company madean emergency request to the North Slopeproducers to cut total production back to32,000 barrels per day, just 5 percent of theregular flow rate.

Need for restartAlyeska has for several years been

studying the impact of declining pipelineflow rates and devising ways of dealingwith low-flow problems. Using data fromthese low-flow studies, a company engineerdetermined that, despite the unresolved oilleak, the pipeline needed to be restarted toprevent ice formation in the line and toenable recovery of the two pigs, Hainessaid.

The situation became one of balancingrisks, the risk of damage from the oil spillversus the potentially catastrophic conse-quences of a pipeline freeze-up, Barrettexplained, saying that he decided that arestart was essential, despite the fact thatrestarting a line with an oil leak “ran acrossthe DNA” of every pipeline regulator.

“That was actually from my perspective… the most prudent course of action for usto take,” Barrett said, commenting that hewas also concerned about the possibleimpact of weather-related delays in movingall of the necessary equipment and materi-als to Prudhoe Bay, were the pipeline toremain shut in.

Following the preparation and checkingof safe restart procedures, oil started flow-ing down the line again on Jan. 11, withvacuum trucks sucking leaking oil from thebooster pump building.

By that time, with much of the NorthSlope field production already having beenshut in, the producers could only restoretotal production to about 400,000 barrelsper day, a volume not high enough to elim-inate the risk of a freeze-up, Haines said.Alyeska put into operation one of the tech-niques designed from its low-flow studies,the cycling of oil at some of the pump sta-tions to keep the oil warm, she said.

Pigs recoveredIn the event, the Alyeska team, in opera-

tion around the clock along the entire lengthof the line, managed to recover both of thepigs from the line, as oil slowly flowedagain, thus averting the possibility of astuck pig, the biggest freeze-up concern.

And about four days after the temporarystartup, with all the necessary equipment,materials and personnel on site at PumpStation 1, Alyeska shut the pipeline downagain, to install piping to bypass the pumpbuilding oil leak. By then, with a change inthe weather causing temperatures to plum-met, welders and other personnel workedaround the clock, completing the repairsand allowing the pipeline to restart after twodays.

“We had people working at 20 belowinside buildings at Prudhoe Bay,” Barrett

6 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

Even under the most optimistic forecasts, the U.S. will still depend on oil and natural gas for almost 65% of its domestic energy consumption in 2025.

We are currently importing 58% of our oil, much of it from regions of question-able stability and regimes not always friendly to the U.S.

Prudhoe Bay was initially estimated to hold 9.6 billion barrels of oil. So far, Prud-hoe Bay has produced over 15.9 billion barrels of oil.

Alaska believes predictability is a good thing. That’s why we hold annual lease sales for areas with known petroleum potential. And when our lease sales take place, the environmental challenges of potential oil and gas development have already been assessed. That way, you know before bidding on tracts what environmental issues you are likely to encounter, and what measures are required for exploration and development. So once your lease is issued, you are ready to start the environmental permitting process.

Alaska has many natural resources,and a constitutional mandate to develop them responsibly.

So we plan ahead.

Alaska: We’re Open For Business!Division of Oil and Gas550 West 7th Avenue, Suite 1100Anchorage, Alaska 99501-3560tel: 907-269-8800http://www.dog.dnr.state.ak.us/oil/

� P I P E L I N E S & D O W N S T R E A M

Jan. shutdown puts TAPS close to brinkAlyeska executives describe efforts to prevent freezing in pipeline after pump station oil leak in era of low oil throughput

TOM BARRETT

see TAPS SHUTDOWN page 8

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 7

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� N A T U R A L G A S

FNG to offer newinterruptible serviceNew rate class would allow utility to expand sales without expandingcapacity, would make natural gas available to more customers

By ERIC LIDJIFor Petroleum News

L ooking to temper seasonal swings indemand, Fairbanks Natural Gas

wants to start offering interruptible serv-ice to smaller volume customers at a dis-counted rate.

The lone natural gas utility in fuel oildominated Fairbanks is asking theRegulatory Commission of Alaska toapprove a new “small volume interrupt-ible rate.”

The rate would be available to cus-tomers who expect to buy at least 2 mil-lion cubic feet of gas per year and whocan also switch between fuels on as littleas six hours notice.

With that minimum volume, the newrate is geared toward large commercialcustomers, although the service couldindirectly cover individuals in largerapartment complexes.

In return accepting interruptible serv-ice, customers who chose the rate wouldget a 10 percent discount of the largecommercial rate, currently $22.66 perthousand cubic feet.

The seasonal swing in Fairbanks isamong the most dramatic in the world.Because winter demand can be five timeshigher than summer demand, FairbanksNatural Gas said it is often faced withunused capacity for months, but can’tadd more customers in the summer with-out further tightening supplies in thewinter. “The solution is to serve addi-tional customers when FNG has excesscapacity, but not have those customers onthe system at the peak when FNG’scapacity is limited,” the company wroteto the RCA.

Fairbanks Natural Gas said severalpotential customers have alreadyapproached the utility requesting inter-ruptible service, believing that the costbenefit of buying natural gas for some ofthe year outweighs the inconvenience ofswitching fuels on short notice.

Natural gas is usually, but not always,cheaper than fuel oil in Fairbanks.

Fairbanks Natural Gas argues thatadding interruptible users will lower theaverage cost for all customers by spread-ing fixed costs over more cubic feet. It

would also allow Fairbanks Natural Gasto increase sales without expanding sup-plies or facilities.

Still eyeing North SlopeThe proposal is an interesting twist on

an issue long facing Fairbanks NaturalGas: captive customers. FairbanksNatural Gas is not economically regulat-ed, meaning it can change its rates with-out the approval of regulators. For years,that led to concerns that some customerswould be “captive” to high prices, unableto easily switch fuels.

Fairbanks Natural Gas and the AlaskaAttorney General addressed that concernin a 2009 settlement, allowing FairbanksNatural Gas to stay economically deregu-lated as long as it tethered residentialrates to those paid by large commercialusers, a class of customers that typicallycan switch easily between fuels shouldone become prohibitively expensive.

Fairbanks Natural Gas already offersinterruptible service to large volume cus-tomers, such as major industrial cus-tomers expected to buy more than 50million cubic feet in a given year. Thosecustomers are guaranteed only a two-hour notice before curtailments beginand the price per hundred cubic feet isworked out through a negotiated agree-ment.

Fairbanks Natural Gas is still workingto switch its supply source to the NorthSlope from Cook Inlet. The utility signeda supply contract with ExxonMobil in2008, but can’t take advantage of thatcontract without major infrastructureinvestments.

In 2009, the Alaska Gasline PortAuthority proposed to buy the utility andbuild the infrastructure needed to con-nect it to North Slope supplies, a projectestimated to cost around $250 million.The Port Authority and its partnersrecently said that the plan should beready for financing this spring and couldbe delivering natural gas before 2013.

Fairbanks Natural Gas has contractedCook Inlet supplies through May 31,2013. �

Contact Eric Lidji at ericlidji@mac.com

By WESLEY LOYFor Petroleum News

Alyeska Pipeline Service Co. is chal-lenging many of the concerns federal

regulators raised in a proposed safety order.The U.S. Pipeline and Hazardous

Materials Safety Administration didn’tspecify any fines or other penalties. But inits Feb. 1 notice to Alyeska, the agency saidcorrective measures appear necessary toaddress “multiple conditions” on the trans-Alaska pipeline system posing a risk topublic safety or the environment.

These measures include replacingpotentially corroded pump station piping;adding new pig-handling equipment;expanding oil storage tank capacity; andrevising the pipeline cold restart plan.

PHMSA issued the notice following anoil leak at Pump Station 1 that forced twopipeline shutdowns in January, the longestone lasting about 84 hours.

In a Feb. 15 response, Alyeska PresidentTom Barrett challenged much of PHMSA’sproposed safety order. Barrett himself for-merly headed the agency.

“We support actions in the proposedorder that will enhance safe operation ofTAPS,” said Barrett’s letter dated Feb. 15.“However, Alyeska believes that some ofPHMSA’s preliminary findings and pro-posed actions fail to reflect sound opera-tional practice, propose out of sequenceactivities or address matters external toTAPS.”

‘To the contrary’Alyeska is an Anchorage-based consor-

tium that runs the pipeline for owners BP,ConocoPhillips, ExxonMobil, Chevronand Koch Industries. The pipeline has beenmoving North Slope crude oil since 1977.

Barrett took issue with PHMSA’s sug-gestion that Alyeska isn’t dealing adequate-ly with integrity challenges arising from

declining oil throughput and temperature,including potential freeze-ups andincreased waxing inside the pipeline.

“Alyeska has been, and will continue tobe proactive to address risks resulting fromdeclining flow,” Barrett wrote. Stepsinclude more aggressive pigging of the lineand “multiple changes in operations as aresult of studies conducted of low flowconditions.”

Barrett also pushed back against criti-cism that Alyeska had difficulty imple-menting its cold restart procedures duringthe January shutdown, partly due to an“inability to quickly move equipment” intoposition along the pipeline.

“To the contrary, Alyeska successfullyexecuted the Cold Restart contingency planas written,” Barrett said. “Moving equip-ment up and down the 800 miles ofpipeline was conducted in a measuredmanner. The pipeline was not in a circum-stance that dictated the need to implementthe plan, so moving equipment into placewas precautionary. There was no need tohastily move heavy equipment on winterroads in limited daylight in a hurried orunsafe manner. We will not compromisepersonnel safety because PHMSA or any-one else thinks we should perform someoperational activity more quickly.”

Equipment used in a cold restartincludes piping, pumps and generators tohelp circulate oil and warm the system,Alyeska spokeswoman Michelle Egan toldPetroleum News. The pipeline never hasgone through a true cold restart, and wasmany days away from such a scenario afterthe January leak, she said.

On pigs and tanksIn its proposed safety order, PHMSA

suggested the pipeline might need addi-tional pig launchers and receivers. A pig isa device that slides through a pipeline toclean its inner walls, or to test for problemssuch as corrosion.

The agency noted that two cleaning pigswere in the southern half of the pipeline atthe time of the January shutdown, but theonly permanent pig receiver to removethem was at the end of the line in Valdez.

Alyeska’s “inability” to capture pigs atinterim locations between Pump Station 4and Valdez is a risk condition, as a pigcould “cause a plug” in the pipeline duringa shutdown and cold restart situation,PHMSA said.

Barrett, in his reply letter, said Alyeska“has a spool piece of pipe that can be, andwas, successfully and safely used” to cap-ture one pig at Pump Station 8, located 311miles north of Valdez. “Alyeska justdemonstrated that a permanent pig receiveris not the only method capable of safelyrecovering pigs,” he wrote.

However, Alyeska agrees a permanentpig launcher and receiver “may be desir-able” between pump stations 5 and 10,Barrett said.

PHMSA also suggested increased oilstorage tank capacity at pump stationsmight be needed “to assist during pro-longed outages and the implementation ofa cold restart.”

During a TAPS shutdown, a lack of stor-age, particularly just upstream of Pump

� P I P E L I N E S & D O W N S T R E A M

Alyeska answers federal pipeline criticBarrett says operator of trans-Alaska pipeline is on top of challenges associated with declining oil flow; talks begin with PHMSA

8 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

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said.By the time that the pipeline restarted

after the repairs, the oil temperature in thebowl area of the line was down to around 28F, Haines said. And, with the producersunable to fully restore oil throughput imme-diately, it was 15 to 18 days before fresh oilmoved fully through the system, she said.

Safety is paramountSaying that personnel safety had been

the top priority and that there had been noidentifiable environmental harm from theoil leak incident, Barrett slammed any crit-icism of the length of time that it had takenAlyeska to bring the trans-Alaska pipelineback into operation.

“I’m not getting anyone hurt bringingthis line back up,” he said.

At the same time, the experience ofdealing with a forced winter pipeline shut-down has re-enforced concerns about win-ter operation of the pipeline, as pipelinethroughput continues to drop. There a num-ber of possible scenarios that could forceanother winter shutdown in the future, withsome of these scenarios not involving afault in the pipeline itself, Barrett said.

And, although Alyeska continues to seekways of dealing with low oil flow, the bestsolution to the low temperature problems isto pump more oil through the line, aprospect that seems improbable over thenext five to 10 years, he said.

“It’s declining flow and it’s not lookinggood to me,” Barrett said. �

continued from page 6

TAPS SHUTDOWN

Contact Alan Bailey at abailey@petroleumnews.com

see ALYESKA page 9

By KRISTEN NELSONPetroleum News

There have been plans for the northeastand northwest areas of the National

Petroleum Reserve-Alaska, but the Bureauof Land Management is now preparing aplan for the entire area.

“We’re trying to take the whole thing anddo it again, looking at it as a whole, ratherthan just piecemealing the planning deci-sions,” Bud Cribley, BLM’s new Alaskastate director, toldPetroleum News in aFeb. 2 interview.

The goal, he said, is“to achieve some kind ofa big picture of how the future developmentof that entire area could take place, at leastwithin the next 20 years.”

Decisions from previous plans includethat Teshekpuk Lake will not be leased anddeferral of leasing on the shorelines andadjacent country so that additional informa-tion on wildlife species can be gathered.One issue there is concerns such as subsis-tence hunting, Cribley said.

Companies have been able to lease inNPR-A, but not develop, and Cribley saidone of his questions to staff working o theplan is, “do we need to do things different-ly?”

Some basic issues which have to beovercome, such as access, are not underBLM’s control, he said.

That is the difficulty ConocoPhillips ishaving getting its CD-5 project permitted,because the Corps of Engineers denied a

permit for a bridgeacross the NigliqChannel and a roadfrom the bridge toexisting Alpine facili-ties.

“BLM is notdirectly involved withCD-5,” was not acooperating agencyon the project,because the scope of the project in NPR-Awas small, Cribley said.

But the BLM’s director has met withcounterparts at the Corps of Engineers, andthe secretary of the Interior has met with hiscounterpart in Washington, Cribley said. Ifcircumstances change, BLM “is ready toengage in any way that we can to help outwith that permitting process.”

And if another opportunity presenteditself to participate, if for exampleConocoPhillips submitted a new applica-

tion, then BLM would probably “takeadvantage of that and be a cooperatingagency with any NEPA document in thefuture,” he said.

Everyone involvedIn the plan BLM is currently writing,

covering the entire NPR-A, it made aneffort to get everyone involved. Agenciescooperating with BLM are the U.S. Fish andWildlife Service, the Bureau of OceanEnergy Management, Regulation andEnforcement, the North Slope Borough andthe State of Alaska.

By having all those agencies involved,“we can have discussions with them look-ing at the impact, looking at the alternativesand making sure that we’re … addressingevery issue that we can anticipate so that wecan try to do the best we can to precludesome of those problems down the road.”

Cribley said BLM’s goal is to have adecision “that creates a comfort level on the

part of the industry that there are assurancesthat they will be able, if they were to go inand invest into and lease those lands, thatthey would have the ability to develop thoseresources while still protecting … theworld-class resource values that are withinthe boundaries.”

Ted Murphy, BLM’s Alaska deputy statedirector for the Division of Resources, saidlease sale schedules have in the past beenheld about every other year, and the agencywill move toward that again.

“Whether it’s every other year orwhether it’s on a recurring basis that seemsto be the mantra from industry: As long asyou’re consistently offering whatever overwhatever period it is, consistent, they canwork with that.”

Murphy said it would probably take sixto nine months after a record of decisionwas issued before a lease sale was held, so

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Better.

Station 1, means production from oil fieldsmust be limited among companies or halt-ed, which can damage production facilitiesand increase the risk of spills in coldweather, PHMSA said.

Barrett said the agency reached “ques-tionable conclusions” about the impact of aTAPS shutdown on North Slope produc-tion facilities.

“Storage facilities upstream of PS 1 arenot something that Alyeska has the abilityto control operationally or legally,” Barrettwrote. “This statement does not belong inany enforcement action against Alyeska.Further, the size of storage facilities alongthe pipeline has no causal connection to thelength of prorations or increased risk ofproduct release in cold weather.”

What next?Alyeska requested an “informal consul-

tation” with the regulators to talk about theproposed safety order.

These talks already have begun.On Feb. 17, Mike Joynor, operations

senior vice president for Alyeska, and JoeRobertson, compliance and ethics director,met in Denver with PHMSA WesternRegion officials based there.

Alyeska and PHMSA could sign a“consent agreement” on a work plan toaddress risk conditions on the pipeline.

Barring that, Alyeska could request anadministrative hearing. If the pipeline isfound to pose a public, property or envi-ronmental risk, then PHMSA could issuean actual safety order. �

continued from page 8

ALYESKA

Contact Wesley Loy at wloy@petroleumnews.com

� G O V E R N M E N T

Big picture the goal with new NPR-A planSome areas already deferred for 10 years as more information collected; Native, environmental, industry interests all at play

BUD CRIBLEY

see NPR-A PLAN page 10

with a record of decision around the end of2012, the next lease sale would be in 2013.

He said BLM would like industry toshare with the agency where they’d like tolease.

“I think that’s a critical aspect of devel-oping the National Petroleum Reserve, isgetting that fix on what’s of interest andwhen is it of interest to the industry,”Murphy said.

Historically large blocks were offeredbecause it’s been tough to get a handle onwhat’s of interest to industry, he said.

The state offers all of the acreage inspecified areas every year, but Murphy saidthat in his view, “the state doesn’t have asregulated a NEPA process as we do.”

Focus on opportunitiesMurphy said because this generation of

the integrated activity plan for NPR-A cov-ers the entire area, there will be consistencyin the stipulations, “consistency in therequired operating procedures and it willafford those assurance that industry and theenvironmentalists, conservation groups,often ask for and so I think will pave theway for the future of the petroleum reserve.”

It is a big job, he said, and there are tighttimeframes, but the federal agencies, theNorth Slope Borough and the state, are allseasoned.

“Everybody’s been through at least onerodeo; we’ll get to the end,” Murphy said.

“And that’s one of the reasons why … in

this document that we won’t go out with apreferred alternative in the draft. …

“We don’t want to steer it too much. Wecan adjust that when we get to the end, afterwe get all the feedback on our range of alter-natives and then come up with what is themost reasonable approach to the NationalPetroleum Reserve.”

Cribley noted that the two recent planscreate a foundation for the work that’s beingdone now, which looks “at it on a more inte-grated basis,” which should allow theagency to “create a better vision of thefuture, what the future of that land is, andwhere we’re going to go with the develop-ment of it.”

Pipeline issuesA separate issue, but one BLM can’t

ignore, Cribley said, is the proposed naturalgas pipeline from the North Slope.

“If it happens we will be integrallyinvolved with that because it will invariablycross public lands,” and so BLM will beinvolved with any environmental document

that’s developed and with the actual permit-ting.

He said BLM has “staff on board that iscontinuing to coordinate with the differentproposals within the state and making surethat if they do move them forward that we’refully engaged with that.”

He said preliminary work includes look-ing at feasibility and some of the challengesthat would have to be overcome. There aremultiple projects on the table, “but we wantto be prepared and be in the queue to step upand do our part when that does happen. It’sone of those things that’s based on econom-ics. It could turn overnight on you — all ofa sudden you’ve got a new huge workload.”

So even though none of the projects iscurrently moving forward and “nothing isgoing on, you can’t let your guard down:You have to be engaged and paying atten-tion.”

See part 1 of this story in the Feb. 20issue. �

10 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

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NPR-A PLAN

Contact Kristen Nelson at knelson@petroleumnews.com

� F I N A N C E & E C O N O M Y

Libya drives oil prices to almost $100Saudi Arabia says it has spare production capacity, if needed; International Energy Agency would also step in to offset shortfalls

THE ASSOCIATED PRESS

Oil prices rose again Feb. 24 as the rebellion in Libyaappeared to have shut down even more crude produc-

tion than previously estimated.Italy’s Eni, the largest oil producer in Libya, said the vio-

lent uprising has taken 1.2 million barrels per day off themarket, up from previous estimates of about 1 million bpd.Most of that oil is exported to Europe, but it will push pricesup everywhere by increasing competition for similar vari-eties of higher-quality crude used to make gasoline and jetfuel.

In the U.S., benchmark West Texas Intermediate cruderose $1.67 to $99.77 per barrel on the New York MercantileExchange. Prices have jumped 18 percent since Feb. 18. InLondon, Brent crude added $2.95 at $114.20 on the ICEFutures exchange.

At the pump, gasoline prices rose more than 2 cents Feb.24 to a new national average of $3.228 per gallon. A gallonof regular is 11.8 cents higher than it was a month ago and55 cents more than the same time last year, according toAAA, Wright Express and Oil Price Information Service.Experts estimate that the national average could rise as highas $3.75 by spring.

Gasoline costs an average $3.60 per gallon in Californiaand $3.44 per gallon in New York. The cheapest gas could be

found in Wyoming, at an average of $2.998 per gallon.Oil prices are climbing even though the world’s largest oil

consumer, the U.S., has large supplies of both oil and gaso-line. The Energy Information Administration reported Feb.24 that oil supplies in the U.S. grew the week ending Feb. 18by 800,000 barrels. That’s less than analysts expected, butsupplies are still well above average for this time of year.Gasoline supplies fell by 2.8 million barrels.

America in competition for oil“It doesn’t matter what the supply is here,” analyst and

trader Stephen Schork said. “America is in competition withEurope and Asia and everywhere else for oil. And whenthere’s a shortage somewhere, it pushes prices everywhereelse.”

With no clear outcome in sight, Schork said the violencein Libya has put a “fear premium” of about $15 to $20 perbarrel on oil prices. That premium is currently flowingthrough energy markets, pushing gasoline prices to the high-est levels ever for this time of year.

Oil and gasoline prices will likely hold at elevated levelsas long as Libya’s future remains uncertain, said MichaelLynch, president of Strategic Energy & Economic Research.Prices should fall again once order is re-established. Libyarelies on oil revenues and it will need to keep operations run-ning no matter who is in charge, he said.

“It doesn’t look like there’s any real damage to Libya’s oilfields,” Lynch said. “So once there’s a government in placeeverything could get back up and running within a fewweeks.”

If protests subside in the region, oil prices could eventu-ally fall to where they were earlier in February, pulling pumpprices down anywhere from 30 to 40 cents per gallon, Lynchsaid.

In other Nymex trading in March contracts, heating oilrose 4 cents to $2.9603 per gallon and gasoline added 6 centsat $2.9305 per gallon. Natural gas lost 10 cents at $3.842 per1,000 cubic feet.

Saudi’s have spare capacitySaudi Arabia’s oil minister said Feb. 22 the oil power-

house has ample spare capacity to offset any supply disrup-tions, while other OPEC ministers downplayed the need topump new crude into the world market to temper an oil pricerally fueled by unrest in Libya.

The International Energy Agency, looking to allay con-cerns, said it “stands ready” to step in and offset any supplydisruptions.

Saudi Arabia, the de facto leader of the Organization ofthe Petroleum Exporting Countries, said it has enoughreserves. Saudi oil minister Ali Naimi said the kingdom’s

see OIL PRICES page 12

By CAIN BURDEAUAssociated Press Writer

The federal judge who struck downthe Obama administration’s morato-

rium on deepwater drilling after the Gulfoil spill on Feb. 17 ordered the InteriorDepartment to act quickly on five pend-ing permits.

U.S. District Judge Martin Feldmantold the Interior Department’s Bureau ofOcean Energy Management, Regulationand Enforcement to act within 30 days.The agency rules on permit applicationsin the Gulf of Mexico.

The judge said the agency needed toprocess permits to “restore normalcy tothe Gulf region.” He said the inaction hadhurt drilling companies and threatenedthem with “endless disability.”

His ruling came in a lawsuit broughtby Ensco Offshore Co., which claims thegovernment has wrongfully delayed issu-ing permits since it lifted a moratoriumon such projects in October. The adminis-tration had barred new drilling in reactionto the spill.

In June, Feldman overturned theagency’s decision to halt new permits fordeepwater projects and suspend drillingon 33 exploratory wells after theDeepwater Horizon blast, which killed 11workers and triggered the massive spill.

The ruling was hailed by drilling advo-cates.

“It’s past time we got back to work inthe offshore,” said Erik Milito, a directorat the American Petroleum Institute.“Every day that goes by without a permitis damaging to our economy.”

Melissa Schwartz, a spokeswoman forBOEMRE, said regulators were review-ing Feldman’s ruling.

The Obama administration has saidthat it wants to make sure offshoredrilling can be done safely before issuingnew permits. Regulators have demandedthat oil companies prove they’re able tocontain a blowout of an underwater wellbefore granting permits to drill again inGulf waters deeper than 500 feet.

System builtOn Feb. 17, a group of oil companies

led by Exxon said it had built such a sys-tem. It is designed to be fully assembledin two to three weeks after a blowout. Itcan work at depths up to 8,000 feet andcapture as much as 60,000 barrels of liq-uid and 120 million cubic feet of gas perday.

BP’s Macondo well blew out at about5,000 feet below sea level and spilled anaverage of 52,400 barrels per day. At itspeak, BP’s well spewed 61,900 barrels perday.

Earlier in February, MichaelBromwich, director of the Bureau ofOcean Energy Management, said thatcompanies must show they have “accessto and the ability to deploy” equipmentthat can contain another large spill.Government engineers are still reviewingthe new system.

Meanwhile, Gulf Coast politiciansvowed to keep the pressure on the InteriorDepartment.

U.S. Sen. David Vitter, R-La., said hewould continue to block the nomination

of a new U.S. Fish and Wildlife Servicedirector until drilling permits are issued.

“I’ll continue my hold on the presi-dent’s newest Interior Department nomi-nee until he follows the law and issuesdeepwater exploratory permits,” Vittersaid. �

� G O V E R N M E N T

Judge orders Interiorto move quicklyBureau of Ocean Energy Management, Regulation andEnforcement given deadline on Gulf deepwater permits

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 11

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ENVIRONMENT & SAFETYThawing permafrost to accelerate warming

Carbon released from vegetation preserved in thawing permafrost will impact therate of global warming, researchers from the National Snow and Ice Data Center andthe Cooperative Institute for Research in Environmental Sciences predicted in a newreport published on Feb. 14.

Plant material frozen in soil duringthe last ice age is being released as per-mafrost melts under the impact of ris-ing Arctic temperatures, thus causingthe ancient vegetation to rot and releasecarbon into the atmosphere.

Using climate predictions from theIntergovernmental Panel on ClimateChange, the researchers calculated that29 to 59 percent of the current per-mafrost will disappear by 2200, a loss in 200 years of permafrost that took tens ofthousands of years to form. That loss of permafrost would release 126 to 254 gigatonsof carbon, volumes corresponding to about one-fifth of the total carbon currently inthe atmosphere, the researchers estimated.

“The amount of carbon released is equivalent to half the amount of carbon that hasbeen released into the atmosphere since the dawn of the industrial age,” said NSIDCscientist Kevin Schaefer. “That is a lot of carbon.”

People developing strategies for addressing climate change need to considerthe quantities of carbon coming from thawing permafrost in addition to carbonreleased into the atmosphere from the use of fossil fuels, the researchers say.

—ALAN BAILEY

Plant material frozen in soil duringthe last ice age is being released aspermafrost melts under the impactof rising Arctic temperatures, thuscausing the ancient vegetation torot and release carbon into the

atmosphere.

His ruling came in a lawsuitbrought by Ensco Offshore Co.,

which claims the government haswrongfully delayed issuing permits

since it lifted a moratorium onsuch projects in October. The

administration had barred newdrilling in reaction to the spill.

production capacity is at 12.5 million bar-rels per day, a level that can help “compen-sate for any shortage in international sup-plies.” His comments were carried on theofficial Saudi Press Agency.

Mohammed bin Dhaen al-Hamli, the oilminister for the United Arab Emirates, saidthat OPEC “will intervene if need arises, butsupplies are reaching the market so far.”

Libya is the first of the OPEC memberstates to be hit by the wave of unrest that hadled to the ouster of the leaders of Tunisia andEgypt.

The uprising against Moammar Gadhafiis the most violent in the region, so far, andhas sent tremors through oil markets con-cerned that the demonstrations could spreadand disrupt flows from other OPEC mem-bers, particularly Saudi Arabia. OPEC sup-plies about 35 percent of the world’s crudeoil. While international markets are reeling,OPEC appeared to adopt a wait-and-seeapproach, convinced that the price spikeswere not related to the actual volume ofcrude oil on the market. �

12 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

energy in focusCreative photography for Alaska’s oil and gas industry

FINANCE & ECONOMYBuccaneer Alaska promotes Rike to EVP

Buccaneer Energy has promoted Andy Rike to executive vice president of opera-tions for Buccaneer Resources and Buccaneer Alaska, the company announced onFeb. 17.

Rike previously worked for Gulf Oil, Chevron and Schlumberger. For the last 31years he has worked both onshore and offshore on assignments in Cook Inlet, France,Dubai, Saudi Arabia, the Rocky Mountains, Texas, Louisiana, South America and theeastern United States. He has a petroleum engineering degree from Louisiana TechUniversity.

“Andy has proven through his work history and his time with Buccaneer that heknows what needs to be done to be successful in this business. He is extremely goodat bringing the right equipment to the table to create cost effective solutions to chal-lenging problems,” Curtis Burton, CEO and managing director of Buccaneer, said ina statement. Buccaneer Alaska is the local subsidiary of Australian independentBuccaneer Energy.

Since arriving in Alaska in March 2010, Buccaneer has established five Cook Inletprospects it hopes to explore in the next few years, including two offshore projects.

Buccaneer is trying to bring a jack-up rig to the Cook Inlet as soon as this summer.—ERIC LIDJI

NMFS to hold hearings over seal listingsThe National Marine Fisheries Service has announced that it will hold public hear-

ings in Anchorage, Barrow and Nome to gather comments on the proposed listings ofringed and bearded seals under the Endangered Species Act. The Anchorage hearingwill take place on March 7, with the Barrow hearing scheduled for March 22; NMFShas not yet settled on a date for the Nome hearing.

Communities along the Beaufort Sea and Chukchi Sea coasts will be able to tele-conference into the Barrow hearing.

In 2008 the Center for Biological Diversity petitioned NMFS to list the seals, say-ing that global warming is melting the Arctic sea ice that the seals depend on for shel-ter and for raising their pups. The center later sued NMFS to force a listing decision.On Dec. 3, 2010, NMFS issued a notice proposing the listing of the seals as threatened.

NMFS now says that it is responding to requests for public hearings and that it hasextended the original 60-day public comment period for the listing proposals: The com-ment period will now end on March 25. Written comments can be submitted to NMFSup to that date.

—ALAN BAILEY

ENVIRONMENT & SAFETY

The company did not drill any NorthSlope exploration wells this winter.

The budget number comes as law-makers are considering ways to increaseinvestment on the North Slope, includ-ing lowering taxes and promoting accessto existing facilities.

“We expect ConocoPhillips Alaska’s2011 capital budget spending to be basi-cally flat from 2010,” ConocoPhillipsspokeswoman Natalie Lowman toldPetroleum News, noting that actual2010 spending was the lowest since2007. “The 2011 capital budget includescontingency funding if we are success-ful in getting improvements in State fis-cal terms, and resolving permittingissues with Alpine satellites.”

Focusing on the Lower 48The budget suggests ConocoPhillips

is focusing more on other domestic proj-ects this year. The company is budgeting$3.3 billion for Lower 48 explorationand production projects, nearly doublethe $1.8 billion spent in 2010 and upfrom $2.6 billion in 2009.

ConocoPhillips is pursuing projects

in the Eagle Ford shale in Texas, as wellas liquids-rich plays in the Permian andBarnett fields in Texas and in theBakken Shale in North Dakota. Thecompany is also budgeting for ongoingdevelopment in the San Juan basin andfor its share of the Marine WellContainment Co., an oil spill responseproject.

ConocoPhillips also plans to increaseits spending internationally.

The company is budgeting $7.1 bil-lion for overseas exploration and projec-tion projects, up from $5.9 billion spentin 2010 and $5.4 billion spent in 2009.

Companywide, ConocoPhillips isproposing an $11.3 billion budget forexploration and production projects, upfrom $8.5 billion spent in 2010 and$8.9 billion spent in 2009. �

continued from page 1

CONOCO CAPEX

Contact Eric Lidji at ericlidji@mac.com

FINANCE & ECONOMYBenefits of Alaska OCS development cited

Shell said Feb. 24 that a study by Northern Economics and the Institute forSocial and Economic Research at the University of Alaska has highlighted poten-tial economic benefits — to Alaska and to the nation — if oil and gas resourceson Alaska’s outer continental shelf are developed.

A 2009 study by Northern Economics and ISER found that development in theBeaufort and Chukchi seas would extend the life of the trans-Alaska oil pipelinefor decades.

The new study uses the same development scenarios, and estimates that devel-opment of Alaska’s offshore resources could create an annual average of 54,700new jobs through 2057, resulting in a total of $145 billion in new payroll paid toemployees through 2057 — $63 billion in Alaska and $82 billion in the rest of theUnited States.

Shell Alaska Vice President Pete Slaiby said it is important that Shell continueto make a business case for potential offshore development to Alaska and the restof the U.S.

“First and foremost is putting in place a safe, responsible exploration program.But if we realize the full potential of the oil and gas resources in the Alaska off-shore, generations of Americans will have the opportunity to directly benefit fromindustries’ success,” Slaiby said in a statement.

Note: See story in March 6 issue.—PETROLEUM NEWS

The company is budgeting $3.3billion for Lower 48 explorationand production projects, nearlydouble the $1.8 billion spent in2010 and up from $2.6 billion

in 2009.

continued from page 10

OIL PRICES

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 13

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14 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

� F I N A N C E & E C O N O M Y

Unocal pursues Forestfor $48 millionFederal lawsuit argues Forest obligated to pay operating expensesas ex-owner in Trading Bay properties on Alaska’s Cook Inlet

By WESLEY LOYFor Petroleum News

Union Oil Company of California issuing Forest Oil Corp. in an Alaska

court for $48 million.The case has to do with who’s respon-

sible for the costs of operating the TradingBay unit, field and production facility onAlaska’s Cook Inlet.

In its suit pending in U.S. DistrictCourt, Unocal contends that Forest owesthe $48 million as a former stakeholder inthe Trading Bay assets.

Forest, on Feb. 10, filed an answer tothe suit saying it “vigorously denies”owing anything. The company asked thatthe case be dismissed.

Changing handsUnocal, a subsidiary of Chevron

Corp., operates Trading Bay, while Forestwas among a succession of companiesholding a stake in the properties.

Forest came into Trading Bay as aresult of the merger in 2000 withForcenergy Inc., which was an owner inTrading Bay.

Forest would exit Trading Bay in 2007,conveying its ownership interest toPacific Energy Resources Ltd.

Pacific Energy filed for bankruptcy inMarch 2009, and as part of the bankrupt-cy proceedings the company abandonedits interest in Trading Bay and rejected itsobligations under unit and operatingagreements, including the commitment topay its share of Trading Bay operatingcosts.

The lawsuit contends that Forest, whenit transferred its Trading Bay ownership,did not obtain Unocal’s release from theseobligations.

Pacific Energy failed to make pay-

ments to Unocal for its share of operatingcosts, and now Forest is on the hook forwhat’s owed, the lawsuit argues.

Forest, however, says Unocal “did notobject” to the Trading Bay transfer toPacific Energy, and the sale marked theend of any obligation Forest had to payoperating costs.

Oil sales insufficientAs Trading Bay operator, Unocal has a

lien on each owner’s share of oil produc-tion to secure the payment of operatingexpenses, the lawsuit says.

“Union has exercised and continues toexercise its lien rights at the wellhead,”the suit says, with proceeds from the saleof oil applied to Pacific Energy’s past duebalance.

But these proceeds have been insuffi-cient to cover what’s owed, the differencebeing $48 million as of Jan. 1, the suitsays.

The suit alleges breach of contract,saying Forest “remains obligated” to paya proportionate share of Trading Baycosts despite having transferred its inter-est to Pacific Energy.

“And Union’s damages continue toaccrue,” the suit adds.

Trading Bay is among the propertiesChevron is aiming to sell in a planned exitfrom the Cook Inlet basin. �

Forest came into Trading Bay as aresult of the merger in 2000 with

Forcenergy Inc., which was anowner in Trading Bay.

Contact Wesley Loy at wloy@petroleumnews.com

PIPELINES & DOWNSTREAMRCA extends CPAI ‘10 tariff another year

State regulators have given ConocoPhillips another year to continue collectingincreased shipping rates on the trans-Alaska oil pipeline while they prepare for hear-ings this fall. ConocoPhillips requested the increased rates in 2010 and the RegulatoryCommission of Alaska allowed the company to collect them on a refundable basisuntil Feb. 22, 2011.

ConocoPhillips can now collect the rates through Feb. 22, 2012.That rate case is now one of 11 consolidated into a single docket, bringing togeth-

er three years of rate increases from four companies. The RCA and the Federal EnergyRegulatory Commission are planning joint hearings on the cases that begin in October.

The hearings concern whether and how the cost of Strategic Reconfigurationshould be included into shipping rates on the 800-mile pipeline from Prudhoe Bay toValdez.

If all the proposed increases are approved on a permanent basis, it would more thandouble the cost to ship a barrel of oil from the North Slope to markets within the state.

—ERIC LIDJI

GOVERNMENTClipping the EAB wings

Frustrated at the remand by the Environmental Appeals Board of Shell’s air qualitypermits for planned drilling in the Beaufort and Chukchi seas, Rep. Don Young, R-Alaska, has introduced a bill amendment in the U.S. House of Representatives to limitthe EAB’s ability to do something similar in the future. The amendment, to the Housebill for 2011 appropriations for federal agencies, would curtail funding for EAB reviewof Environmental Protection Agency permits for activities on the Arctic outer conti-nental shelf — the House of Representatives has passed the amendment by a vote of243 to 185, according to a release from Young’s press office.

“This amendment does not circumvent the EPA’s authority. Instead it continues togive permitting decisions to the professionals in the regional offices. What this amend-ment will do is remove the ability for lawyers to overrule EPA permit writers,” Youngtold House members. “Over $4 billion have been invested in trying to drill explorato-ry wells, and to date not a single well has been drilled because of one EPA air permit.”

The amendment prohibits the EAB from using any funds from the 2011 appropri-ations to “consider, review, reject, remand or otherwise invalidate any permit issued forouter continental shelf (emissions) sources located offshore the states along the Arcticcoast.”

—ALAN BAILEY

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 15

Do you have an extra laptop you’d be willing to part with? No, I’mnot adding to my own stockpile of consumer electronics or trying tostrike it rich on the pawn shop circuit. Rep. Les Gara is working withFacing Foster Care Alaska to collect laptops for foster youth. Laptops are a critical tool for foster youth to keep up with schoolwork and stay connected with family and friends while theyare moved to different homes and schools.

If you are interested in donating a laptop, please make sure it isfully functional and meets the following standards:

Is in excellent working order;Is no more than 4 years old;Has a word processing program;Does not need any repairs.

For more information, or to donate a laptop, please contact eitherRep. Gara’s office at (907) 465-2647, or Amanda Metivier at FacingFoster Care Alaska at (907) 230-8237.

Laptops for Foster Kids

� P I P E L I N E S & D O W N S T R E A M

Alberta governmentbacks Edmonton area upgrader

By GARY PARKFor Petroleum News

T he Alberta government is plungingahead with its support for the high-

value business of upgrading and refining oilsands bitumen by contributing some of itsown royalties in kind to a C$5 billion refin-ery in the Edmonton area.

Under an agreement with North WestUpgrading and Canadian NaturalResources, it will supply 37,500 barrels perday of bitumen to North West’s plannedindependent merchant upgrader, which willuse a gasification technology to turn feed-stock into synthetic crude for refining intojet fuel and gasoline.

About half of the facility’s output will bea low-sulfur diesel, initially about 5.5 mil-lion liters per day, with other productsincluding diluents, naphtha and natural gasliquids.

In a separate, but related deal, theprovince agreed to provide C$495 millionover the next decade to Enhance Energy tobuild a 145-mile pipeline from the upgraderto carry 3,000 metric tons per day of carbondioxide generated at the plant to enhancedoil recovery projects in central Alberta.

That is projected to produce an addition-al 1.4 billion barrels of oil from convention-al reservoirs.

“Conservatively, we believe the long-term economics of this project are positive,”said Energy Minister Ron Liepert, defend-

ing the government’s attempt to keep moreof the value-added end of its bitumen extrac-tion in Alberta. “We are embarking on a newera and both projects are of strategic impor-tance for us.”

The upgrader, which is scheduled forcommissioning by mid-2014, is expected toinvolve C$15 billion of investment overthree phases by 2025, said North WestChairman Ian MacGregor.

In addition to the government’s 37,500bpd, Canadian Natural will supply 12,500bpd of bitumen from its oil sands operations.

Alberta Premier Ed Stelmach, who hasspearheaded the effort, said the venture isrisky “but we have never shied away fromtaking bold steps.”

He said the expanding presence of Asiancompanies in the oil sands is changingAlberta’s view of the oil sands, which hedescribed as “an immense resource fromboth global energy security and geopoliticalperspectives.”

Stelmach said the U.S. population of 300million will not sustain the “quality of life”in Alberta, so the province needs to “moveinto markets with a billion population.”

To that end, Alberta will supportEnbridge’s struggle to gain approval for itsNorthern Gateway project, while the U.S., ifit stands in the way of pipelines fromAlberta, “can take our bitumen on rails.” �

Contact Gary Park through publisher@petroleumnews.com

EXPLORATION & PRODUCTIONEscopeta ship headed for Gulf of Mexico

The heavy lift vessel set to carry a jack-up rig to Alaska is headed for the Gulf ofMexico. The M.V. Kang Sheng Kou left Lagos, Nigeria, on Feb. 21 en route toFreeport, Texas, where it will eventually pick up the Spartan 151 rig being winterizedin Galveston.

Escopeta Oil contracted the ship and the rig for a Cook Inlet drilling campaign.The Kang Sheng Kou ship is owned by the Cosco Group.The 500-foot ship is estimated to arrive in Freeport around March 8. Once the rig

is loaded, the Kang Sheng Kou will travel around South America en route to Alaska. Under an agreement with the Alaska Division of Oil and Gas, Escopeta must have

a rig bound for Alaska by March 30 and must start drilling its first well by Oct. 31.The company expects the rig to arrive in Alaska in May

—ERIC LIDJI

ENVIRONMENT & SAFETYUSCG admiral warns about Arctic needs

There is an inadequate infrastructure to support a major oil spill response in Alaska’sArctic offshore, retired U.S. Coast Guard Admiral Thad Allen told the U.S. HouseTransportation and Infrastructure Committee on Feb. 11. Allen was the national inci-dent commander for the response to the Gulf of Mexico Deepwater Horizon disaster.

Barrow, the only port close to Beaufort Sea and Chukchi Sea oil and gas lease areas,“has limited access and no ability to support large-scale operations,” Allen wrote in tes-timony to the committee. The closest port with significant capacity is Nome, but thatport cannot handle vessels with drafts of more than 21 feet, Allen wrote.

Two of three icebreakers inoperableAllen also commented that two of the Coast Guard’s three icebreakers are currently

inoperable and have reached the ends of their service lives. Meantime, decisions overfuture icebreaker needs continue to be delayed and the National Science Foundation-based funding mechanism for icebreaker operations is dysfunctional, Allen wrote. Thefunding for icebreaking operations must be moved to the USCG and there needs to be“serious discussion” regarding the loss of capabilities resulting from the decommis-sioning of the two out-dated vessels.

“In the absence of forward operating bases and infrastructure, seaborne commandand control capabilities will be vital in any response, including search and rescue andother activities,” Allen wrote. “The only vessels in the U.S. fleet capable of operating inthose environments in all ice conditions are Coast Guard icebreakers.”

Allen also urged U.S. ratification of the Convention of the Law of the Sea Treaty,the United Nations convention that provides a framework for international agreementson jurisdiction over extended areas of the Arctic Ocean.

“This treaty … should underpin any domestic and international planning for spillresponse,” Allen wrote.

—ALAN BAILEY

16 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

Team Industrial ServicesTeam Industrial Services is the largest specialized industrial services company in North America

through service leadership and innovation. The company’s more than 3,500 trained, and experiencedtechnicians provide mechanical, inspection and heat treating services and products for 7,000 customersworldwide. Team’s integrated services include leak repair, hot tap, field machining, technical bolting,valve repair, field heat treating, NDE/NDT inspection, emissions control and much more.

Jane E. Griffel

Having moved to Alaska in 1984, Griffel has been with Team for more than 5 years. One of her mostdefining moments in life was shooting her first bull moose under less than desirable conditions, on theway home from work, wearing heals and a skirt: The moose was legal and she just decided to go for it!Married for 24 years, Griffel has three children that she enjoys watching and actively participating insports across Alaska.

Jeannette Diamond

Having been an owner and operator of her own business in a male dominated industry all her life, ina well drilling company that has been very successful, Diamond is in the process of selling the businessthat brought her to Team and is very excited to be a part of such a good company. Happily married, sheand her husband have five boys and one girl between the two of them and are avid snowmachiners.

ADVERTISER PAGE AD APPEARS ADVERTISER PAGE AD APPEARS ADVERTISER PAGE AD APPEARS

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Business Spotlight

Jane E. GriffelAlaska Branch Manager

Jeannette DiamondAdministration Assistant

CO

URT

ESY

PH

OTO

S

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 17

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The shuffle coincided with wordthat TransCanada, the deemed fron-trunner to ship gas from the MackenzieDelta to northern Alberta, has writtendown C$127 million of the money itcontributed to cover regulatory costsincurred by the APG.

In the process, TransCanada ChiefExecutive Officer Russ Girling said hasno further material expenses plannedfor the MGP.

He said “uncertainty persists” overthe MGP’s commercial structure, aconstruction timetable and the outcomeof fiscal negotiations with theCanadian government.

But he insisted TransCanadaremains committed to bringingMackenzie Delta gas on-stream.

Others are taking an outrightgloomy view of where the projectstands.

Nathan Cullen, natural resourcesspokesman for the opposition NewDemocratic Party, told The Hill Timesthat it is worrisome for the industrypartners and those for and against theMGP that the Harper governmentappears to have dropped the ball.

He doubted Duncan could be famil-iar with the file and said he will needweeks or months to catch up, “if heever does,” challenging the govern-ment’s selection of “a low-ranking min-ister” to be in charge of a C$20 billionproject.

Kitimat pace quickensWhile the waiting game continues

for the MGP, the pace continues to pickup around the Kitimat LNG project,adding to a view that future gas pro-duction from northeastern BritishColumbia poses the biggest threat tothe economic prospects for Arctic gasdevelopment.

Among the latest developments,Nexen, a major leaseholder in the HornRiver basin, has added its name to thelist of companies looking for ways tohasten development of shale gasresources that are faced with two obsta-cles — their distance from big NorthAmerican markets and their viability ina saturated, low-priced environment.

Nexen Chief Executive OfficerMarvin Romanow told analysts Feb. 17his company hopes to line up a joint-venture partner this year to advance itscurrent British Columbia holdings of300,000 acres and production of 45million cubic feet per day, copying

deals struck by Encana withPetroChina for C$5.4 billion and withKorea Gas; Talisman Energy withSouth Africa’s Sasol; and Penn WestExploration’s joint venture with Japan’sMitsubishi.

He said priority will go to a partnerable to focus on developing assets overthe next 40 years, noting that more gashas been discovered in Horn Riveralone than in all of Alberta, which hasdominated Canada’s gas productionover the past 60 years.

Case for single systemRomanow also suggested there is a

case to be made for building a singlepipeline system to carry oil and naturalgas to the deepwater port at Kitimat forexport to Asia and overcome some of thechallenges to the Kitimat LNG andEnbridge’s Northern Gateway projects,which face varying degrees of resistancefrom First Nations and environmentalists.

He said a combined outlet to Asiawould enable Canadian producers to cap-ture some of the current US$18 per bar-rel premium for Brent-priced crude overWest Texas Intermediate crude.

John Crum, North American presi-dent of Apache — which owns 51 per-cent of Kitimat LNG, with EOGResources holding the rest — said Feb.17 that discussions are under way withseveral prospective Asia-Pacific buyers.

He said that means corporate sanc-tioning of the C$3.5 billion project ispossible by the end of 2011 and exportsof 700 million cubic feet per day couldstart by late 2015 followed by significantexpansion.

Gerry Goobie, managing consultantfor Purvin & Gertz, said the rapidincrease in Asian investment in Canada’sshale gas assets means Kitimat LNG hasa “pretty good shot” at going ahead.

But he doubts any other ventureswould proceed until Kitimat is built andestablishes itself as a successful opera-tion.

Penn West Chief Executive OfficerBill Andrews said his company is “con-vinced that the sooner we get a connec-tion to the Pacific Rim and have theability to move some gas there, the bet-ter off we’ll be.” �

talists. It takes 20 years to permitKensington mine (in Juneau).Everywhere we turn, we are being shutdown by the EPA, the Corps ofEngineers or some environmental groupon developing resources in the state orthe U.S. Their concern is global warmingor whatever their concern is for theweek. What they are doing is drivingbusiness and resource development toThird World countries that don’t have theconstraints and controls that we put onthe oil industry here or the mining indus-try. In my opinion they are contributingmore to the problem than what they aresaving. When we concern ourselves witha $14 trillion national debt, if you lookat how much oil we import because wewon’t develop our own resources.

Petroleum News: What are your con-cerns with the trans-Alaska oilpipeline?

Chenault: I don’t think people under-stand the urgency of keeping thatpipeline full. Right now we are at about630,000 barrels (a day). When we talkabout when are they going to shut downthat pipeline, I think there are peopleout there who think we don’t have aproblem until we get to 300,000 barrels.We need to do what we can in order tokeep that pipeline full — now. If wedon’t, it’s going to be shame on uswhenever we have a problem because85 percent of Alaska’s budget is basedon oil flowing through that pipeline.Yeah, we’ve got money in the bank andwe’ll but OK, but how long does thatlast?

Petroleum News: Cobbling all this

together — tax credits, base rate, pro-gressivity — is that a 90-day project oris it a two-year legislative term project.

Chenault: I don’t know. Whatevertimeframe it takes to put a programtogether that moves Alaska forward,gets investment into the state of Alaska,that puts more oil into the pipeline,that’s how long it will be. I want it to bedone right, but I don’t think we canafford to spend two, three or four yearsto make it perfect as some want or towait for more information. I’m not dif-ferent than anyone else. I want to seeguarantees in return, but there are noguarantees in life. We tripled our taxfour years ago. What I’ve seen is lessinvestment and less exploration. Nowsome of the exploration hasn’t hap-pened because of the federal govern-ment, but when we look at projected oilproduction, we’ve seen projects thataren’t coming online and they probablywon’t under the current tax regime thatwe have. We’ve got companies actuallyleaving the state for North Dakota.What does that tell me? It tells mesomething is wrong. If we don’t fix it,we may not have any of that industry.

Petroleum News: Oil prices just hit$100 a barrel. Do you think high oilprices are …

Chenault: They are masking theproblem. They are masking the prob-lem. If oil prices were $50 today, wewould be hemorrhaging money out ofthe state budget, but high oil prices aremasking the problem. �

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MGP OUTLOOK

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CHENAULT Q&AI don’t think people understand the

urgency of keeping that pipelinefull.

—House Speaker Mike Chenault

Contact Gary Park through publisher@petroleumnews.com

While the waiting gamecontinues for the MGP, the pacecontinues to pick up around the

Kitimat LNG project ...

Surveys and Division of Oil and Gas areembarking on a multiyear research programto investigate the resource potential of thissedimentary basin, known as the Susitnabasin and separated at its southern end by amajor geologic fault from the prolific oiland gas bearing Cook Inlet basin. Theresearch program is the first of what DGGSanticipates as a series of investigations intothe energy resources of several Alaskabasins that could perhaps supply energy forrural communities as well as major popula-tion centers, as the cost of energy consumedin Alaska soars, DGGS geologist DaveLePain told Petroleum News Feb. 18.

“Energy is a huge challenge in the stateright now,” LePain said.

The U.S. Geological Survey and possiblysome university geologists will help withthe Susitna basin program, Le Pain said.

Little knownAlthough much is known about the geol-

ogy of the Cook Inlet basin and there is awell substantiated model for how that basinhas formed, very little is known about theadjoining Susitna basin.

“We really don’t understand why that(Susitna) basin is there,” LePain said.

But an understanding of the history ofthe basin is critical to evaluating the poten-tial presence of exploitable gas resources inthe basin.

In the Cook Inlet basin a sequence ofTertiary rocks, more than 25,000 feet thickin the deepest part of the basin, were laiddown as sediments deposited from riversand lakes. And periods of lush vegetationduring the Tertiary period gave rise to abun-dant coal seams, as the sediments sank andbecame buried. Those coal seams, contain-ing vast volumes of natural gas, are beinglifted up by forces within the Earth’s crustand this uplift, starting perhaps 5 million to10 million years ago, has reduced the pres-sure on the coal, thus releasing gas from the

coal, with the gas migrating into the sand-stone reservoirs of the Cook Inlet gas fields,LePain said.

Geologists know from surface rock out-crops and from the nine exploration wellsdrilled in the Susitna basin that this basincontains coal seams in a similar Tertiaryrock sequence to that of the Cook Inletbasin. But how pervasive are the coals, andhave the strata of the Susitna basin, likethose of the Cook Inlet basin, gone througha gas-releasing uplift? If coals are extensivein the basin and if they have generated andreleased gas, are suitable reservoirs and sealrocks present to form gas fields? Thesequestions remain unanswered.

In addition, almost nothing is knownabout the older Mesozoic rocks that lieunderneath the Tertiary of the Susitna basin.The Jurassic Tuxedni group of the Cook

Inlet Mesozoic sequence has sourced mostof the oil in the Cook Inlet oil fields. Dosimilar Mesozoic source rocks exist underthe Tertiary of the Susitna basin?

Few rock exposuresOne of the biggest challenges for any

investigation of Susitna basin geology is thegeneral lack of exposed rock in the swampsand forests of the Susitna Valley. There are,however, some good rock exposures aroundthe perimeter of the basin and the DGGS-ledteam plans to spend about 10 days in thesummer of 2011 taking an initial look atthose exposures, investigating the nature ofthe rocks and determining the quality of thecoals known to exist in some outcrops, LePain said. Members of the team will also flyacross the interior of the basin by helicopter,seeking any other locations where rock may

be exposed, he said.The team hopes to be able to use these

surface investigations to start to clarify theTertiary stratigraphy of the basin and the wayin which the structure of the basin hasevolved, eventually enabling a geologic com-parison with the way in which gas hasformed and accumulated in the Cook Inletbasin. The DGGS led team also expects toglean information about the Mesozoic rocksthat underlie the Tertiary, especially from sur-face outcrops of the Mesozoic in the YenloHills to the northeast of the tiny hamlet ofSkwentna, in the northern part of the basin.

The team will also use publicly availabledata from the few wells that have been drilledin the Susitna basin. In addition, publiclyavailable gravity data for the basin will pro-vide insights into the thicknesses of theTertiary rocks across the basin, while pub-licly available aeromagnetic data will provideclues about the nature of the underlyingMesozoic rocks and about major geologicstructures such as faults, LePain said.

Proprietary seismicThere is some 2-D seismic data for the

basin, but all of this data is proprietary and isheld confidential within DNR. The agencycannot publish the data without permissionfrom the data owners but does use it toinform surface geologic mapping in poorlyexposed areas, LePain said.

One well in the Susitna basin penetratedthrough the Tertiary strata into the underlyingMesozoic rocks and demonstrated the exis-tence of a 3,000- to 4,000-foot thickness ofTertiary strata, although the Tertiary is knownto be thicker than that in some parts of thebasin, LePain said.

“In deeper parts of the basin we think wehave a thick enough section to where wecould have an appreciable amount of coal,”he said.

The summer 2011 reconnaissance field-work, coupled with the analysis of existingpublicly available subsurface data, willenable the team to put together a plan forcompleting its Susitna basin program. Thatprogram will take at least two years to com-plete, after which the team will shift its atten-tion to other Alaska basins. For now, theSusitna basin seems the “low hanging fruit”of the underexplored basins with energypotential.

“It’s right next to the road system andclose to the population centers,” Le Pain said.“It’s a good place to start.” �

18 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

When you need it, We’ve got it.

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Fax (907) 659.2650brooks@astacalaska.com

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The Susitna basin lies under a huge lowland area to the north of Anchorage and is separat-ed from the Cook Inlet basin to the south by the Castle Mountain Fault.

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SUSITNA GAS

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Contact Alan Bailey at abailey@petroleumnews.com

operating company for AVCG and hasbeen drilling on the North Slope since2007. Great Bear Petroleum is a companynewly formed to target unconventional oiland gas from source rocks beneath theNorth Slope; it acquired more than500,000 acres in the state’s October NorthSlope areawide lease sale.

BRPC and AVCG talked about anincremental plan involving the state,majors and independents, while GreatBear focused on its plan to produce oilfrom source rocks in an area south ofexisting development.

New developmentsBart Armfield, vice president of oper-

ations for BRPC, talked about “plan2050,” and said it takes an incrementallook at what would be required to keepthe trans-Alaska oil pipeline flowing at600,000 barrels per day.

It’s a phased approach, he said, andrequires the State of Alaska, the majorcompany players and all of the independ-ents.

If 10 new fields averaging 12,000 bpdare brought on in the next 12 years, thatwould increase recoverable reserves byhalf a billion barrels, and require inexcess of $6.3 billion.

“History demonstrates that we can” dothis, Armfield said, based on what hasoccurred over the last 12 years withAlpine, Northstar, Oooguruk andNikaitchuq coming online and Badamirestarted.

That isn’t 10 fields, he said, “but col-lectively they represent the equivalent of10, 12,000-barrel-of-oil-per-day fieldprojects.”

To get to the next level, 20 years out,requires that 22 more fields be broughtonline.

Armfield said unconventionalresource plays and technology develop-ments in the Lower 48 demonstrate whatcan happen, and said that in the very nearfuture that may be applicable to the NorthSlope of Alaska.

By the end of the day, in “plan 2050,”44 new developments have occurred,

requiring more than $18 billion in newinvestment.

Armfield said the new fields are acombination of developments withinexisting units and grassroots develop-ments. In the first 12-year phase, if exist-ing units supported four new develop-ments “then new players would supportsix grassroots developments.”

But the $18 billion to bring on that

from the Agrium Kenai NitrogenOperations, comprising Plants 4, 5, and6, from Kenai, Alaska to Ossiomo,Nigeria.”

The report from the trade publicationsaid the $25 million shipping contractwas set to be finalized in March andwould require two heavy lift vessels —the Fjord and the Fjell — to mobilize toAlaska in early July and complete thetrip to Nigeria by December.

Agrium acknowledged the report, butwouldn’t say whether or not it’s true.

“Agrium continues to look at all ouroptions for the Kenai facility, but nothingis finalized yet,” Paul Poister, manager ofU.S. government relations, toldPetroleum News.

After posting his original report,Harbour followed up with an e-mail fromRobert J. Roest of Mammoet USA,South Inc., one of the reported contrac-tors on the shipping project.

Roest said his company would bebringing a “large crawler crane into thearea,” but would only be using the pieceof equipment for Agrium for about onemonth, adding that he had a prospect foranother job “very close by” that wouldtake up another week.

“My idea is to present the opportunity

of a large machine against a very com-petitive rate to other heavy industries inthe area,” he wrote, suggesting “petro-chemical plants and refineries, powergeneration, mining operations, shipbuild-ing and fabrication yards.”

The equipment could “manipulate300-350 ton loads with relative ease,”Roest wrote.

“The way I see it is that this opportu-nity presents a significant cost saving forplant operators as opposed to bringing amachine just for one project,” he wrote.“And yes, I get more business out of it; itis a cliché, but it would be a sure win-win for everybody.”

For now, though, Alaska will have towait and see what happens.

—ERIC LIDJI

Itta largely sheds anti-development stance foroffshore drilling in Arctic

THE FEB. 16 EDITION of Barrow’sArctic Sounder carried a headline thatwould have shocked Alaskans seven yearsago at the beginning of Edward Itta’s firstterm as mayor of the North SlopeBorough.

The headline read, “Mayor Itta:

Dwindling oil oppor-tunities forcerethinking of anti-development stance.”

And re-thinking isobviously what he isdoing, having repeat-ed what he told thenewspaper at a Feb.17 House FinanceCommittee in Juneau.

Itta was there with others, includingRex Rock Sr., president and CEO ofASRC, to participate in a discussion onfederal regulatory issues affecting eco-nomic development in Alaska.

Although Itta’s reason for being moreopen to offshore oil development wasattributed to his constituents being underattack by the Obama administration, hesaid it was also because of the work Shellhas done with his people and their repre-sentatives.

“Shell has come a long ways toaddressing the critical concerns of our

communities — and sometimes above andbeyond the federal requirements,” he toldcommittee members.

Itta said he was “disappointed” whenPete Slaiby, Shell vice president for Alaskaoperations, called him Feb. 2 to tell himShell was once again postponing itsBeaufort Sea drilling because of continu-ing permitting uncertainty with the U.S.Environmental Protection Agency.

“I think Shell has earned the right tostart their exploration program,” Itta said.

He said he has come to the realizationthat for the Inupiat people of the NorthSlope “resource development and eco-nomic development are one and the same.The economy in our region … is all drivenby oil. … In a sense we’re more dependenton oil than the state. We need economicdevelopment to sustain our subsistenceway of life; that’s our reality now.”

—KAY CASHMAN

PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011 19

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INSIDER

EDWARD S. ITTA

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OIL FLOW

see OIL FLOW page 20

Contact Kay Cashman at publisher@petroleumnews.com

Contact Eric Lidji at ericlidji@mac.com

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much new development really requires$36 billion in investment, Armfield said,because “not every project is going to besuccessful on the North Slope.” He saidhe used the 50-50 rule, with half failuresand half successes, “which is probablyvery aggressive.”

To get $36 billion of new investmentcapital coming into the state requires “thepositive adjustment through HB 110,”Armfield said.

Taxation an issue with investorsKen Thompson, managing director of

AVCG, called in to testify from theNAPE Expo in Houston, where compa-nies show oil and gas prospects.

Thompson said AVCG was lookingfor a partner to bring additional capitalso that projects could be accelerated butalso to look at “substantial upside onsome of our acreage in the shale oil thatyou hear so much about in the Lower48.” He said AVCG is looking for a part-ner with expertise and said this is thesame play concept Great Bear has on itsacreage.

Thompson said Alaska’s fiscal systemmakes it tough to attract partners andrelated that AVCG lost a former partner,Bow Valley, when Dana Petroleumacquired Bow Valley, concluded the fis-cal regime in Alaska was tougher than inthe United Kingdom, and decided tofocus solely on the UK.

AVCG attended NAPE last summerand had 12 companies express stronginterest, but over time all but onedropped out.

“If I were to rank the number one rea-son they said no, it’s the Alaska fiscalregime and the taxation is simply highand complicated. Several have elected toput their money into North Dakota inwhat’s called the Bakken oil shale wherethere’s a much more favorable severancetax rate. And also they do not face someof the same risks that Alaska does, sothat’s certainly a factor,” Thompson said.

The board of the remaining companyneeds to approve and Thompson saidsenior management told him that “theboard members just want to hear onething and that’s about Alaska’s taxes.” Hesaid he’d prepared a presentation andwill have to update it based on how HB110 progresses, but he said the taxationissue is the only issue remaining with

that prospective partner, and “I hope wecan overcome that.”

AVCG has a goal of achieving two ofthe oil fields needed in the first phase ofthe 2050 plan, he said, “so if we can justfind a few other companies or attractsome additional investors I think that canadd up to the 10 fields we need. … Thenthe pie is larger and … everybody’shappy,” he said.

Nonconventional playEd Duncan, president and chief oper-

ating officer of Great Bear Petroleum,told the committee that competition forcapital is on a global scale, and saidwhile Alaska presents an opportunity foroil and gas investment, “we also see agreat opportunity for Alaska to improveits position globally” by making the taxchanges proposed in HB 110.

Alaska is prospective for develop-ment because “it has some of the bestrocks in one of the best petroleumprovinces in the world.” But, Duncansaid, “it also has some fiscal terms thatare suppressing development.” GreatBear was high bidder on 537,500 acresin the 2010 North Slope areawide leasesale, an area the company picked for itssource rock.

“This is an opportunity to deliver aplay that has long-lived production;manageable risk; allows the state to fore-cast forward revenue; (and) has tremen-dous job growth associated with it — ifwe can make it happen,” he said.

The risk is not technical but “com-mercial viability in competition for cap-ital (because it) requires capital to makethis play really happen,” Duncan said,describing the play as both capital inten-sive and labor intensive.

Proof of conceptDevelopment will require long-length

lateral wells and fracturing and the firststep is to prove up the concept.

This year, Duncan said, Great Bearwill build a rock mechanics model.

“Our rock mechanics studies will bedrill holes with whole rock extracted”and then do technical analysis of rockstrength to give the company “a betterpicture of how wells will drill and whatkind of fracture stimulation technologywill be deployed.”

Two full production tests will bedrilled next January through April.

“The full-length laterals will be fullexploration style wells.”

Duncan said that in unconventionalresource plays once the boundaries of theplay are known, “industry tends to movetoward a factory type drilling,” increas-ing the rate at which wells can be drilledand stimulated and put on production.

“We have a very aggressive annualdrilling schedule in a full developmentmode — 200 to 250 wells a year wouldbe our target,” he said, with developmentdrilling beginning in 2013, and up to 250wells a year for 20 years, a total of 3,000.

Steady-state production would be150,000 bpd, but would peak at some300,000 bpd before dropping back to the150,000 bpd plateau.

Capital intensive“House Bill 110 will aid Great Bear

in attracting critical capital,” Duncansaid. At 250 wells a year the capexrequired for drilling alone is in excess of$2 billion a year, he said.

And that doesn’t include facilities —roads, pipelines, pump stations and pro-cessing facilities.

Duncan said initial-stage investmentcapital for the company came fromfriends and family.

“The additional stages of investmentcapital that’s come forward to fund usthrough our proven concept stage hasbeen very broad and significant,” hesaid, and will get them through the proofof concept stage, but changes in HB 110would enable the company to go after thecapital needed for full development.

The company has taken office spacein Anchorage, but Duncan said “our mis-sion is not to build a glass tower inAnchorage; our mission is to build tech-nical alliances with key serviceproviders that actually have cumulativelyfar greater experience than we could everassemble if we went out and hired.”

Duncan said his greatest fear goinginto the October lease sale was that hewould “have to really twist arms with thereally big service providers to get thetechnology, drilling and well completiontechnology, and people” needed for theproject.

But when Great Bear met with com-panies they found what they needed wasalready in the state, although not usedvery often, because Great Bear is “thefirst company to do that unconventionalplay.”

—KRISTEN NELSON

20 PETROLEUM NEWS • WEEK OF FEBRUARY 27, 2011

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OIL FLOW

Contact Kristen Nelson at knelson@petroleumnews.com