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Company finds oil on Alaska's North Slope; did ACES help or hurt?

Pat Forgey

Spanish major oil company Repsol has announced striking oil in three wells it drilled on the North Slope in the just-completed winter exploration season, resulted in competing claims of responsibility.

Repsol came to Alaska under the oil tax regime known as "Alaska's Clear and Equitable Share," or ACES, when it bought a 70 percent stake in the wells. The company didn't provide specific flow rates for the wells, but said that two "yielded encouraging results for future development," while in the third well "hydrocarbons were identified at multiple levels."

The first two wells were Qugruk 1 and Qugruk 6, while the third was Qugruk 3. All are located between the Kuparuk and Colville Rivers west of Prudhoe Bay, in an area Repsol called "a proven system and adjacent to giant and supergiant fields." The Prudhoe Bay and Kuparuk fields are the two largest oil fields in North America.

Sought reduced oil taxes

Repsol operates the new wells, with minority partners including Armstrong Oil & Gas, an exploration company that first put together the leases and then brought in the deep-pocketed Repsol to lead the drilling effort.

Repsol and Armstrong CEO Bill Armstrong both urged the Alaska Legislature to reduce oil taxes, which it did in the just-completed legislative session. The current ACES oil tax system includes higher tax rates, especially at higher oil prices, but also offers subsidies for drilling new wells that can help cash-strapped exploration companies find new oil.

While Armstrong told legislators they should extend those subsidies, Repsol said that with its strong finances and access to capital, it didn't need the money up front and was more interested in the lower tax rates that were included in Senate Bill 21. On Tuesday, Repsol praised tax "reform" in Alaska but provided few details about how it helped.

"Recent tax reform passed in Alaska was a critical factor in ensuring the development of this project," it said in a press release announcing the discoveries. Company officials didn't say which tax changes or how tax changes in the future might help an already completed exploration project.

Gov. Sean Parnell Tuesday issued a statement linking last winter's Repsol discoveries to Senate Bill 21.

"Today's announcement is another promising step toward creating an Alaska oil comeback," he said, noting that it came just after the passage of Senate Bill 21.

Sen. Hollis French, D-Anchorage, who opposed the bill, said he wasn't surprised to see Parnell praising the Repsol drilling successes. "It's predictable that he is suddenly the chief cheerleader for North Slope development," he said. French was one of those who earlier predicted that, saying "every time something positive happens on the North Slope you would hear the governor touting it and making huge waves about it, versus all the good news that happened a year ago that the governor never mentioned."

Parnell 'time travel'? 

He likened Parnell's statement to "time travel," how a tax cut passed in April could help Repsol find oil in February.

Repsol had earlier told legislators that it came to Alaska more than two years ago, hoping that future tax cuts would make development more profitable. Repsol didn't say Tuesday when or if the wells would enter production, but said exploration and assessment would continue next winter. Exploration can only be carried out during four months of the year when the ground is frozen.

The company told analysts in 2011 that it hoped to begin production of oil in Alaska by 2015, but provided no new information or schedule Tuesday. Its new prospects were very low risk, the company said, due to proven nature of the resource-rich area in which it was drilling. Under the existing ACES oil tax system, exploration companies such as Armstrong and Repsol can get state assistance with such exploration and drilling. That system was changed by Senate Bill 21 to favor production of oil over exploration for new oil.

French noted that the companies received "generous" tax cuts to assist finding oil and getting into production.

Less risky

Investments in developed countries, such as those on the North Slope and elsewhere in the United States, have less risk than in other countries, the company said. Argentina recently expropriated Repsol's holdings in that country.

Earlier this year, Repsol reported its second North Slope spill in two winters, after a hose ruptured during a flow test of an exploratory well, spilling an estimated 6,600 gallons of a mixture containing crude oil and other fluids. "It wasn't a big event," Cathy Foerster, a state oil and gas commissioner, said at the time. "They had a hose rupture."

And a year earlier, the company suffered a blowout during exploratory drilling after its contractor, Nabors Drilling, hit a gas pocket 2,500 feet down at a nearby well known as Qugruk 2, spewing an undetermined amount of natural gas, water and more than 100,000 gallons of drilling mud -- a mixture of water and lubricant that helps clear the hole of debris -- onto the snow.

Severe cold weather caused response efforts at that well to drag on for weeks. Also, the Alaska Oil and Gas Conservation Commission revoked permits for two other Repsol wells, requiring that they reassess the potential for gas hazards following the blowout at Qugruk 2

Contact Pat Forgey at pat(at)alaskadispatch.com