Producers say North Slope has 'no easy oil left'

North Slope oil companies issued a warning on Wednesday morning: Without significant state and federal changes, investment and new exploration will taper off dramatically in 2010.

They also cited huge shale gas reserves in the Lower 48, unfavorable state fiscal policies and massive risk associated with the multibillion dollar cost of a proposed natural gas pipeline as real challenges to delivering Alaska's natural gas to markets.

Spokespeople for majors BP and ConocoPhillips and the smaller Pioneer Resources spoke to several hundred resource industry professionals at the Resource Development Council's annual Anchorage conference.

The bottom line? As North Slope infrastructure ages and easy, profitable oil is drained, companies face increased risk they must balance with lower potential rewards. The increasingly complicated, remote and costly Alaska projects under consideration will have to compete for the companies' investment dollars on a global scale.

"Really, there is no easy oil left on the North Slope," Pioneer Natural Resources Alaska president Ken Sheffield said. "Alaska projects face stiff competition for investment dollars."

ConocoPhillips won't drill exploratory wells in 2010, said Helene Harding, vice president for North Slope operations and development.

The company remains concerned about volatility in oil and gas markets and has deferred some North Slope projects deemed marginal, she said. At the same time, ConocoPhillip's gems, the Kuparuk and Alpine fields, aren't turning out the oil they once did. Harding emphasized the need for an "attractive fiscal structure" from the state to spur additional investment to retrieve the billions of barrels of less accessible, but existing, oil in those fields.

"Kuparuk is going to have to compete ... across the world for investment dollars," she said.

With a heavy tax burden on oil extracted from state lands, the company is shifting its focus to federal leases in the Chukchi Sea.

BP Exploration Alaska President John Minge said his company remains committed to unlocking the next pot of North Slope gold -- heavy oils and natural gas. While BP's strategy hasn't changed with the recent economic downturn, he acknowledged far greater challenges than only a few years ago.

BP's 2010 investment will be divided into thirds, one each for drilling, infrastructure renewal, and growth, as the company weighs risk and reward over a 20 to 30-year time frame, Minge said. The focus will remain on Liberty, a first-of-its-kind extended reach horizontal drilling venture offshore; on Pt. Thomson, where BP holds a heavy interest in the field managed by ExxonMobil; and in Denali, a partnership with ConocoPhillips to pursue a large-diameter natural gas pipeline from the North Slope to Lower 48 markets.

Most of all, BP is counting on Liberty, the first offshore Alaska project entirely on federal waters. The lower tax rates under the federal rules balance risk and reward for the $1 billion-plus investment, Minge said. BP's production won't be subject to the state's Alaska's Clear and Equitable Share severance tax.

BP expects to draw the first oil from Liberty in 2011, and estimated peak production at 40,000 barrels per day.

Natural gas is another story, and more challenged, Minge said. Shale gas reserves in the Lower 48 are expected to meet demand for 50 to 100 years, leaving supply inflated while demand remains flat and Henry Hub prices have sunk to the lowest point of the decade. Demand must increase in order for Alaska gas to find a market, he said.

Pioneer's Sheffield echoed the concerns over the abundant shale gas, calling it "a huge competition for Alaska."

Harding, with ConocoPhillips, said her company has an eye on open seasons scheduled in 2010 for the Denali pipeline and for a similar project by TransCanada, sanctioned by the state, and needs to see a "commercially viable project for shippers."

"There are many uncertainties that are in front of us," she cautioned. Those include high project costs, inflated supplies, a lack of clarity on long-term state fiscal terms, and uncertainty on tax regimes.