Vol. 16, No. 48 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of November 27, 2011 • $2

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

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

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

page3

Heinze steps down as ANGDA CEO to pursue other opportunities

Permanent Fund

Education

Infrastructure

CBRF, reserves

Government services

Live-off-the-income investments

18% Consumption

38%

Real productive asset investments

33%

Rainy-day savings 10%

How Alaska allocated $103.5 billion in oil revenue (collected FY 1977 through FY 2010)

Where’d the money go?

What has Alaska done with the billions it has received in oil rev-enues? And does it have the nerve to use its oil wealth to jump-start a gas pipeline? See story on page 8.

A question of drilling: Great Bearoptimistic about getting rig

Great Bear Petroleum is chomping at the bit, eager to moveahead with a program of source rock oil test drilling onAlaska’s North Slope. But the companystill needs a drilling rig for its plannedexploration and evaluation plans and isalso waiting for approval of permits thatit needs, Ed Duncan, Great Bear’s presi-dent and COO, told Petroleum News Nov.21.

The company plans to drill through theregion’s three major source rock intervalsto obtain rock samples and do some test-ing. The idea is to determine whether oilcan be produced direct from those sources on the North Slopeusing the same style of horizontal drilling and hydraulic frac-turing that has proved so successful for unconventional oil and

Redford builds bridges; approachfrom new premier collaborative

Alberta’s freshly minted Premier Alison Redford has takenonly six weeks to put her province on a new energy path, deci-sively breaking with the province’s reputation for inflexibility thathas been built over recent decades by her predecessors.

During a week-long national and inter-national debut, she made stops inWashington, D.C., New York, Ottawa andToronto, quickly displaying a progressive,consensus-building style as she seeks toturn Alberta’s hopes of becoming an energypowerhouse into reality.

What was originally planned as herchance to “tell Alberta’s story” — in otherwords to put the oil sands in a different per-spective by explaining her government`sbroader energy policy and its record of envi-ronmental stewardship — was sideswiped on Nov. 10 when theObama administration announced that approval of TransCanada’sXL pipeline would be delayed until 2013, potentially scuttling theproject.

Redford took that in her stride in what turned out to be evenmore significant meetings with U.S. State Department officials,congressmen, senators and House Speaker John Boehner, alongwith Canadian political leaders.

She acknowledged Alberta “can’t shy away from criticism and

ALISON REDFORD

see REDFORD page 17

Gearing up for winterCompanies move forward on what could be bumper exploration season

By ALAN BAILEY & KAY CASHMANPetroleum News

The snow has been falling and theground freezing in Arctic Alaska,

and the various companies planningexploration wells for the coming win-ter season are lining up for what lookslike being one of the busiest everexploration seasons on the NorthSlope. The annual freeze-up has yet toreach the point where Alaska Department ofNatural Resources can open up state land for off-road travel, but the department said on Nov. 18 thatit had been approving the pre-packing of ice roadsfor a number of projects in its western coastal area,

and also for a winter road between theNorth Slope Haul Road and the lowerfoothills area.

Brooks Range pre-packing snowAt the Resource Development Council

annual conference on Nov. 17, BartArmfield, chief operating officer ofBrooks Range Petroleum Corp., said thathis company had just starting pre-packingsnow for an ice road that will run from the

southwest corner of the Kuparuk River unit to thecompany’s North Tarn No. 1 well. Brooks Rangefound oil when drilling this well last winter but it

BART ARMFIELD

see BUSY SEASON page 18

Rebirth in Cook Inlet?CIRI says more infrastructure needed; CIE calls access ‘progressivity’ of inlet

By KRISTEN NELSONPetroleum News

There is more oil and gasexploration and devel-

opment activity in Cook Inletcurrently than the basin hasseen in many years.

The Resource DevelopmentCouncil heard two perspectiveson this activity at its annualconference in Anchorage on Nov. 17. Both werefocused on oil rather than natural gas.

Ethan Schutt, senior vice president of land andenergy development for Cook Inlet Region Inc.,said CIRI has been promoting Cook Inlet develop-

ment since it was formed. JR Wilcox, president of

Cook Inlet Energy, whichwas formed and took overoperations after PacificEnergy went bankrupt in2009, focused on the last cou-ple of years.

CIRI is a major landholderin Cook Inlet.

Schutt said CIRI has always been a proponentof Cook Inlet as an oil and gas basin and in the lastfour or five years has been “pushing hard to get

ETHAN SCHUTT JR WILCOX

see INLET REBIRTH page 19

see GREAT BEAR page 20

Alyeska to pay $600KFine is part of settlement between trans-Alaska pipeline operator, PHMSA

By WESLEY LOYFor Petroleum News

The operator of the trans-Alaska pipeline hasreached a settlement with federal regulators to

resolve four enforcement cases dating back to2006.

Under the deal, Alyeska Pipeline Service Co.will pay a civil penalty of $600,000, which repre-sents a considerable savings over the sum of penal-ties the U.S. Department of Transportation’sPipeline and Hazardous Materials SafetyAdministration had originally proposed.

Michael Joynor, Alyeska’s senior vice presidentof operations, and Jeffrey Wiese, PHMSA’s associ-ate administrator for pipeline safety, signed off onthe “compromise agreement” on Nov. 15 and 16respectively.

As part of the deal, Alyeska agreed to drop a fed-eral lawsuit it had filed against the agency chal-lenging a fine imposed in one of the enforcementcases.

Four enforcement actionsAlyeska is the Anchorage-based consortium that

runs the 800-mile trans-Alaska oil pipeline on behalfof owners BP, ConocoPhillips, ExxonMobil, Chevronand Koch Industries.

The seven-page settlement notes that Alyeska andPHMSA agreed the settlement would avoid furtheradministrative proceedings or litigation.

Aside from the $600,000 civil penalty, Alyeskaalso “must develop and implement a risk-basedatmospheric corrosion control program for TAPS,” thetrans-Alaska pipeline system, the settlement says.

� Part 1 of 2

see ALYESKA FINE page 17

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2 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

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

EXPLORATION & PRODUCTION

ENVIRONMENT & SAFETY

NATURAL GAS

6 ConocoPhillips names three new execs

6 New NSB mayor names Adams chief of staff

3 Heinze steps down as ANGDA CEO

PIPELINES & DOWNSTREAM

LAND & LEASING

FINANCE & ECONOMY

10 Enbridge seizes pipeline opening

Dueling with rival TransCanada in rush to serve TexasGulf Coast refineries; plans Seaway line reversal, keeps Wrangler on books

12 Asia — tight link between oil, gas prices

Japan, South Korea, Taiwan, account for 51 percentof world LNG supply; big buyers in Japan and Koreafavor long-term LNG contracts

14 FERC judge: Pick up the pace of hearing

Oral testimony in joint federal-state review of trans-Alaska pipeline shipping rates dispute gets off to slow start in Anchorage

GOVERNMENT

3 Gas competition in Lower 48, Asia-Pacific

ExxonMobil, OFC’s Larry Persily, describe future marketneeds for natural gas, competition in Lower 48, globally to supply need

8 $103.5 billion and aiming for more

Background paper illustrates Alaska has ample money to jump-start a long-coveted natural gas pipeline. But does it have the nerve?

7 Judge upholds beluga endangered status

National Marine Fisheries Service designation upheld,found consistent with Endangered Species Act requirements, best science

4 European giants buck EU fuel label

Total, Statoil, counter pressure to label oil sands crude‘dirty oil’; Total says both Northern Gateway,TransMountain lines needed

5 Companies eyeing ‘billions’ onshore

Three operators are pursuing exploration anddevelopment projects in the ‘billion-dollar fairway,’ home to decades of work

contents

15 Ramshorn has picked up TG World acreage

A question of drilling: Great Bear optimistic about getting rig

Redford builds bridges; approach from new Alta premier collaborative

ON THE COVERAlyeska to pay $600K

Fine is part of settlement between trans-Alaska pipeline operator, PHMSA

Gearing up for winter

Companies move forward on what looks to be a bumper Alaska exploration season

Rebirth in Cook Inlet?

CIRI says more infrastructure needed; CIE calls access ‘progressivity’ of inlet

By KRISTEN NELSONPetroleum News

The good news, the ResourceDevelopment Council’s annual con-

ference heard Nov. 16 and 17, is that thereis growing demand for natural gas, bothin the Lower 48 and globally.

The bad news, said both SteveKirchhoff, vice president of ExxonMobilGas and Power Marketing Co., and LarryPersily, federal coordinator, Office of theFederal Coordinator for Alaska NaturalGas Transportation Projects, is that thereis much more supply than was expected afew years ago, and competition to meetthe market demand.

Rapid changesKirchhoff, who said he looks after

ExxonMobil’s gas marketing for theAmericas, noted that just a few years ago,“the buyers I was talking to in NorthAmerica were worried about security ofsupply,” about where natural gas wouldcome from.

Prices were moving upward and thesolution appeared to be “large-scale, cost-efficient” liquefied natural gas imports.

That was the backdrop, he said, forplanning for large-scale pipelines fromboth the Alaska and Canadian Arctic.

“But as has been the case in the gasindustry a lot of times in my career,”Kirchhoff said, “change has happened at avery, very rapid pace.”

He said that a few years ago it wouldhave been hard to imagine that two tech-nologies that have been around a longtime, hydraulic fracturing and horizontaldrilling, would be put together in theBarnett shale and open a new generationof natural gas production in the UnitedStates.

Those technologies applied to uncon-ventional gas production have now been“proven and perfected, not just once butmultiple times in succession after succes-sion after succession of plays in NorthAmerica,” Kirchhoff said.

The International Energy Agency’smost recent assessment of worldwide nat-ural gas is some 28,600 trillion cubic feet,some 250 years of consumption, vs. pre-vious estimates of 60 years of consump-tion, he said.

In the U.S. the natural gas resourcebase is now enough to meet more than100 years of demand.

“It’s probably fair to say that theassessments that the IEA has today arespeculative, not certain,” Kirchhoff said,but the assessment of the shale resourcein the U.S. “is well grounded and it’sgrowing stronger every day.”

Assessments from elsewhere in worldare based on limited tests, on geoscienceevaluation and on analogues to the U.S.,he said.

“Standing here in Alaska, it might bereally tempting to dismiss the potentialaround the globe as speculative, but I

would say our history in the U.S. argues tothe contrary,” Kirchhoff said.

Demand growthNatural gas demand is expected to

have the fastest growth in the 2005-30period of any energy source, he said. Thedemand for natural gas is expected toalmost triple in Asia over that period andalmost double in the Middle East; growthwill be substantial even in the U.S. andEurope, driven by power use, Kirchhoffsaid.

So far, performance is holding up wellagainst the forecast, he said.

In the U.S. natural gas has been grow-ing in its share of the power market, withcompetitive prices leading to fuel switch-ing over the last three years.

“Gas is also the fuel of choice for themajority of new-built generation projectsthat have been announced in the last fewyears” in the U.S., Kirchhoff said.

And the growing supply of natural gashas given U.S. utilities, and public utilitycommissions, more confidence in thesupply of natural gas available.

And by 2030, more than half of natural

� N A T U R A L G A S

Gas competition in Lower 48, Asia-PacificExxonMobil, OFC’s Larry Persily, describe future market needsfor natural gas, competition in Lower 48, globally to supply need

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 3

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NATURAL GASHeinze steps down as ANGDA CEO

The head of the Alaska Natural Gas Development Authority is stepping down.CEO Harold Heinze announced his resignation to the board of directors of the pub-

lic corporation on Nov. 21, saying he planned to pursue other business opportunities.Heinze became the first and only CEO of ANGDA in 2003, shortly after its for-

mation by voter mandate. Prior to taking the position, Heinzeworked as an engineering manager during the initial develop-ment of Prudhoe Bay, held the position of president at ARCOAlaska and served as the commissioner of the Department ofNatural Resources.

ANGDA began as an entity to facilitate the construction of anatural gas pipeline from the North Slope, but almost immedi-ately found itself struggling to reconcile its voter-mandated mis-sion with the priorities of the gubernatorial administrations itserved within, leading both to creative ventures and to occa-sional consternation from policymakers.

Through its efforts to aggregate utility demand, ANGDA recently became a “ship-per” on behalf of the Alaska Railbelt utilities in the open season for the AlaskaPipeline Project.

“ANGDA has made many contributions to advancing Alaska’s interest in bringingNorth Slope gas to market and allowing Alaskans to share in that opportunity. Thefocus has always been to assure that Alaskan’s had natural gas, including propane, forheat and generation of electricity. We’ve worked diligently to attract large industrial orexport companies to anchor an in-state natural gas transportation system,” Heinzesaid.

The future of ANGDA is uncertain. In addition to Heinze’s departure, the agencydoes not currently have the four appointed board members it needs to hold a quorum.

—ERIC LIDJI

HAROLD HEINZE

STEVE KIRCHHOFF LARRY PERSILY

see MARKET NEEDS page 15

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4 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

Kay Cashman PUBLISHER & EXECUTIVE EDITOR

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

European giants buck EU fuel labelTotal, Statoil, counter pressure to label oil sands crude ‘dirty oil’;Total says both Northern Gateway, TransMountain lines needed

By GARY PARKFor Petroleum News

France’s Total and Norway’s Statoil,two of the largest European-based oil

companies, are countering pressure fromthe European Union to redraw a fuel stan-dard by labeling oil sands crude as “dirtyoil.”

Gary Houston, vice president of mid-stream for Total’s Canadian unit, told aCalgary conference that Enbridge’sNorthern Gateway pipeline and KinderMorgan’s TransMountain pipeline expan-sion will both be needed by 2020 in addi-tion to new capacity to the Texas GulfCoast as oil sands output climbs to 3.5million barrels per day.

He said Total thinks both pipelines tothe British Columbia coast “make sense… and there will be sufficient supply forboth.”

Houston said that once oil is loaded ontankers it costs about $2 per barrel forshipment to China and $3 anywhere elsein the world.

“It gives you instant access to worldprices plus or minus $2 and that’s what weneed to provide some price stability to ourindustry,” he said.

Through partnerships, Total is devel-oping the Joslyn North mine andVoyageur upgrader as well as theSurmont, Northern Lights and Fort Hillsprojects, with planned spending of C$20billion over the next decade and net pro-duction of 200,000 bpd by 2020.

But he warned that even ifTransCanada’s Keystone XL project andEnbridge’s proposed 400,000 bpdFlanagan South pipeline go ahead, theindustry will run out of pipeline capacity

in 2016-18.

Norway: More transparency neededNorway’s Energy Minister Ola Borten

Moe told reporters in Alberta that the EUneeds to be more “transparent and open”on the issue of its fuel directive by takinga closer look at improvements made bycompanies in reducing greenhouse gasemissions levels in Alberta crude.

Although he stopped short of givingunqualified support for investment in theresource by 65 percent state-ownedStatoil, Borten Moe said he was leavingAlberta with a good impression of effortsbeing made to clean up operations.

He also said Statoil’s short-term objec-tive of increasing its oil sands productionfrom 19,000 bpd to 60,000 bpd by 2016on its way to a targeted 200,000 bpd by2025 “is in line with their mandate.”

Statoil’s Canadian President LarsChristian Bacher said the minister posedtough questions about the oil sands sector,but is open to a dialogue based on facts.

Borten Moe said the Norwegian gov-ernment’s view is that the ultimate goalshould be to cut global GHG emissions,not penalize individual fuel sources.

Other developmentsOther oil sands developments includ-

ed:• A regulatory filing by privately

owned Laricina Energy for a three phase150,000 bpd commercial development atits Germain lease in Alberta, adding to analready-approved 5,000 bpd project. Thesecond phase of 30,000 bpd is estimatedto cost up to C$1.5 billion, and come onstream in the third quarter of 2015, with

see FUEL STANDARD page 5

By ERIC LIDJIFor Petroleum News

The “billion-dollar fairway” is suppos-edly what ARCO Alaska called the

land between the Kuparuk River unit and theNational Petroleum Reserve-Alaska, a longstrip running from north to south that seemslike it should be home to massive oil pro-duction, but isn’t.

That could be changing soon.Over the past year, the Alaska

Department of Natural Resources approvedthe formation of five units in that fairway,and is currently considering an applicationfor a sixth.

Those six units, from south to north, arethe Brooks Range Petroleum Corp.-operat-ed Putu, Tofkat, Kachemach and SouthernMiluveach units, the ASRC ExplorationLLC-operated Placer unit and the Qugrukunit proposed by Repsol E&P USA Inc.

Those three companies could drill asmany as 15 wells by mid-2014, and CGGVeritas recently announced plans for a 3-Dseismic survey covering almost the entireregion.

Decades of exploration wellsExploration in the fairway pre-dates the

discovery of Prudhoe Bay.The state first leased acreage in the

northern portion of the fairway in December1964, and Sinclair drilled the first wildcat inthe region, the Colville No. 1, in 1965 and1966.

In the decades since, companies haveoften returned to the region from theColville Delta south, particularly as theKuparuk River unit to the east and theColville Rover unit to the west made thefairway perhaps the closest acreage to infra-structure on the North Slope.

Those previous wells form the basis forthe six current projects.

Putu unitStarting in the south, the Putu unit is not

home to any previous exploration drilling,but there have been four wells drilled nearby— ARCO’s Itkillik River Unit No. 1 in1972, Phillips Alaska’s Atlas No. 1 and Atlas

No. 1-A in 2001, and Pioneer NaturalResources Alaska’s Cronus No. 1 in 2006.All four wells encountered hydrocarbon-bearing zones in the Brookian Torok forma-tion, but none promising enough to warrantdevelopment.

In 2008, Brooks Range Petroleumacquired 220 square miles of 3-D seismiccovering almost the entire unit, identifying“numerous exploration prospects and leads,”including the Musketeer trend and Big Foottrend. The company committed to drillingfour wells into the Upper Jurassic-age strataof the Kingak formation in the unit by May31, 2013.

Tofkat unitJust a mile to the north, surrounding the

village of Nuiqsut, the Tofkat unit is whereBrooks Range Petroleum drilled a well andtwo sidetracks in 2008 — Tofkat No. 1,Tofkat No. 1-A and Tofkat No. 1-B — dis-covering “an oil reservoir within the C mem-ber of the Kuparuk Formation, and two rea-sonably defined and delineated potentialhydrocarbon accumulations in the shallowerNanushuk and Torok formations.”

Brooks Range Petroleum is committed todrill a well and a sidetrack into the Kuparukformation at the unit — Tofkat No. 2 andTofkat No. 2-A — by May 31, 2013.

Kachemach unitBeginning some two miles east of Tofkat

and running north along the Colville River,the Kachemach unit is not home to any pre-vious exploration drilling, but several com-panies drilled wells just outside of the unitboundaries that never led to development.Those wells include Union Oil Co. ofCalifornia’s Kookpuk No. 1 in 1966 and1967, ARCO’s Colville River No. 1 in 1993and ConocoPhillips’ Oberon No. 1 well in2003.

Based on those wells and seismic infor-mation acquired this year, Brooks RangePetroleum indentified potential structuralclosures in the Nanushuk and in the deeperKuparuk formation. To follow up on thosehunches, the company is committed to com-plete two wells — targeting the Caribou andMoonlight trends — by May 31, 2013.

Southern Miluveach unitThe Southern Miluveach unit is some 10

miles east of Kachemach, contiguous to theKuparuk River unit, and is home to recentexploration, in addition to older wells near-by.

After studying the previous wells in theregion, particularly ConocoPhillips’ KRU-2L-03 step-out well from the Kuparuk Riverunit, Brooks Range Petroleum acquired seis-mic information in 2008 and earlier this yeardrilled the North Tarn No. 1 well identifyingan oil reservoir in the Kuparuk C sand. Thecompany is now committed to completethree wells/sidetracks — the North Tarn No.1-A well, the Mustang No. 1 well and theMustang No. 2 well or sidetrack — into theKuparuk formation by May 31, 2012.

ASRC sees Placer potentialNestled between the Kachemach and

Southern Miluveach units, the ASRCExploration-operated Placer unit covers fourleases and 1,480 acres, and two recent

exploration wells. Following an ARCO seismic survey in

the region in 1997, ConocoPhillips drilledthe Placer No. 1 and Placer No. 2 wells in2004, as part of Kuparuk River unit expan-sion.

Arctic Slope Regional Corp., the AlaskaNative corporation for the North Slope area,quietly came on as a working interest ownerin late 2004, its first investment as an inde-pendent oil and gas company under its men-toring agreement with BP Exploration(Alaska). ConocoPhillips gave up the leasesafter its wells proved unsuccessful, butASRC reacquired them in 2006 and latersecured ownership of the Placer No. 1 well-bore.

Since then, the company formed ASRCExploration and became a minority partnerin Savant Alaska LLC’s recent efforts torestart and increase production at theBadami unit.

Now, ASRC Exploration is beginning its

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the next two phases of 60,000 bpd eachstarting in 2018 and 2021.

• Alberta government approval of anapplication by Grizzly Oil SandsResources to build an 11,300 bpd bitu-men extraction and processing facility,with output scheduled for mid-2013. Thefirst phase has a price tag of C$400 mil-lion.

• Koch Exploration Canada got regu-latory approval to build and operate a10,000 bpd facility in the Cold Lake area,forecasting a production life of 25 years.

• North West Upgrading is consideringfast tracking its planned 150,000 bpdbitumen-to-diesel plant, with a finalinvestment decision expected in early2012. The joint venture with CanadianNatural Resources carries an estimatedcost of C$5 billion and will draw 37,500bpd of feedstock from the Alberta gov-ernment’s royalty-in-kind program. �

continued from page 4

FUEL STANDARD

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

Companies eyeing ‘billions’ onshoreThree operators are pursuing exploration and development projects in the ‘billion-dollar fairway,’ home to decades of work

see FAIRWAY UNITS page 7

Contact Gary Park through publisher@petroleumnews.com

By KAY CASHMANPetroleum News

While former North Slope BoroughMayor Edward Itta was quoting

Native leader Jacob ‘Jake’ Adams toencourage members of the Alaska NativeVillage CEO Association to establish busi-nesses that would takeadvantage of the hugeamounts of money theoil industry spends inthe state, his succes-sor, Mayor CharlotteBrower, had justappointed Adams asher chief of staff.

“Mayor Charlotte,”as her office staffrefers to her, tookoffice on the afternoon of Nov. 15. The nextmorning Adams, long-time president andCEO of Arctic Slope Regional Corp., andcurrently chairman of the board, reportedfor work as her chief of staff.

“Tremendous amounts of money are outthere,” Itta was reported as saying in a Nov.21 Alaska Dispatch article about his presen-tation.

“‘If we don’t do it, you can bet some-body else will,’” he said, quoting the charis-matic Adams, who has been a strong sup-porter of Alaska’s oil and gas industry aslong as Native subsistence rights and theenvironment were protected — and Nativesreceived a share of the oil wealth.

It was under Adams’ guidance thatASRC, a company representing the busi-ness interests of 11,000 Iñupiaq Eskimos,became a major oilfield service provider

and refinery owner and signed a mentoringagreement with BP to help it become anindependent North Slope oil and gas pro-ducer.

Adams, a former North Slope Boroughmayor and assembly member and a currentmember of the Barrow Whaling CaptainsAssociation, has also been a strong support-er of opening of the coastal plain of theArctic National Wildlife Refuge for oil andgas exploration.

Although no official announcement hasbeen made by her administration, MayorCharlotte has reportedly asked for resigna-tions from all department and divisiondirectors, including the borough attorney,some of whom will be retiring at the end ofthe year and some leaving immediately.

Gordon Brower, director of the bor-ough’s Planning and Community ServicesDepartment, has been replaced by RhodaAhmaogak.

Brower has been moved to the positionof deputy director of the department, put-ting him in charge of the Land ManagementRegulation Division, where he will overseepermitting and inspecting oil and gas proj-ects, including monitoring compliance withTitle 19 land management regulations andzoning under Title 18.

His assistant, Ben Greene, who had beenfilling in for Brower from mid-August tomid-October, was terminated with one-hournotice by Ahmaogak shortly after MayorCharlotte took office.

Greene was with the Alaska Departmentof Natural Resources’ Alaska Coastal ZoneManagement Program in Anchorage untilhe accepted an offer from the borough,moving to Barrow in May 2008. �

Editor’s note: Under the terms of theAlaska Native Claims Settlement Act, orANCSA, 70 percent of the net revenues real-ized by ASRC are distributed among allregional corporations in Alaska, who in turnshare one-half of their receipts with the vil-lage corporations and their at-large share-holders.

6 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

FINANCE & ECONOMYConocoPhillips names three new execs

ConocoPhillips has begun naming executives for the independent exploration andproduction company which will be created when the company completes its strate-gic repositioning, expected in the second quarter of 2012. Phillips 66, the independ-ent downstream company, will have businesses in refining, marketing, midstreamand chemicals.

Ryan Lance, designated chairman and chief executive officer of the futureConocoPhillips, has selected three members of his executive management team.

Fox to head E&PMatt Fox will become executive vice president, exploration and production. Fox

is a former president of ConocoPhillips Canada, the company said, and has held sen-ior positions for ConocoPhillips in its Canadian Oil Sands, U.K., U.S. and MiddleEast divisions. Most recently, he was executive vice president, international, forNexen Inc. Fox has a bachelor’s degree in civil engineering, and a master’s degree inpetroleum engineering.

Alan J. Hirshberg will become executive vice president, technology and projects.Hirshberg is currently senior vice president, planning and strategy, forConocoPhillips and has also held executive positions at ExxonMobil, overseeing pro-duction operations and major development projects in the U.S., Europe, Africa, andCentral and Southeast Asia. He holds bachelor’s and master’s degrees in mechanicalengineering.

Don E. Wallette Jr. will become executive vice president, business developmentand commercial. Wallette is currently president, Asia Pacific, for ConocoPhillips. Hehas also held senior positions for ConocoPhillips in the U.S., U.K., Norway, Russiaand Caspian divisions. Wallette has a bachelor’s degree in chemical engineering.

Fox will join ConocoPhillips in January 2012 and serve in an interim role, report-ing to Lance, until the repositioning is complete. Hirshberg and Wallette will contin-ue in their current positions until the transaction is finalized.

Mulva to retireConocoPhillips Chairman and Chief Executive Officer Jim Mulva plans to retire

once the repositioning is complete. Two other current executives plan to retire: E.L.(Gene) Batchelder, senior vice president and chief administrative officer, and W.C.W.Chiang, senior vice president, refining, marketing, transportation and commercial.

Batchelder and Chiang will remain in their current roles until the repositioning iscomplete.

ConocoPhillips’ repositioning into two independent companies is subject to mar-ket conditions, customary regulatory approvals, the receipt of an affirmative rulingfrom the U.S. Internal Revenue Service, the execution of separation and intercompa-ny agreements and final board approval.

—PETROLEUM NEWS

� G O V E R N M E N T

New NSB mayor namesAdams chief of staff

JACOB ADAMS

Contact Kay Cashman at publisher@petroleumnews.com

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 7

first solely owned exploration project. Thecompany told state officials that Placer No.1 well results “demonstrated that decentquality oil is present in a thin, but high qual-ity reservoir in the Placer area,” particularlyin the Kuparuk C sand that is the focus ofnearby exploration and development.

Under its unit agreement, ASRCExploration must reprocess and reinterpretnewly licensed seismic data shot across theunit by the end of the year, and must drilland log a new exploratory well, or re-enterand test the Placer No. 1 well, by June 30,2013.

Repsol going strongThe proposed Qugruk unit fills in the

remainder of the fairway to the north.Repsol proposed a 98,852-acre unit cov-

ering a T-shaped area running along thecoastline between the Colville River andOooguruk units and south over the ColvilleRiver Delta.

The Spanish major is proposing the unitalongside Denver-based independent part-ners 70 & 148 LLC (a subsidiary ofArmstrong Resources LLC) and GMTExploration Co. LLC.

The region is home to heavy explorationwork stretching back decades, and the pro-posed unit itself is home to six previouswells. Repsol divides the previous work inthe area into four “distinct phases,” the late1960s and early 1970s, the early to mid-1980s, the 1990s and the latter half of the2000s. After crunching the data from thosewells, Repsol and its partners are chasing“sands within the upper portion of theJurassic Kingak Shale, the CretaceousKuparuk ‘C’ sand and several sands withinthe Cretaceous Nanushuk Group.”

Although the unit application is stillpending, Repsol is already gearing up for anambitious North Slope exploration cam-paign this winter that could include 15 wellsand sidetracks across a large expanse ofacreage, including four planned for theQugruk unit. �

—A copyrighted oil and gas lease mapfrom Mapmakers Alaska was a researchtool used in preparing this story.

continued from page 5

FAIRWAY UNITS

� E N V I R O N M E N T & S A F E T Y

Judge upholds beluga endangered statusNational Marine Fisheries Service designation upheld, found consistent with Endangered Species Act requirements, best science

By DAN JOLINGAssociated Press

A laska’s Cook Inlet beluga whales were correctlylisted as endangered, a federal judge ruled Nov. 21,

rejecting a state lawsuit that claimed the listing will hurteconomic development.

Judge Royce C. Lambeth of U.S. District Court inWashington, D.C., said the National Marine FisheriesService properly followed requirements of theEndangered Species Act and used the best science avail-able in making its determination.

Cook Inlet beluga whales did not bounce back after adecade, despite a ban on subsistence hunting blamed fordepleting their numbers, he said.

“When the best available science predicts that arecently enacted ban on subsistence hunting will reversethe abrupt depletion of a species, a decade without anynoticeable recovery in the species population shouldraise a concern that the true cause of its decline has notbeen fully addressed,” Lambeth wrote.

Sharon Leighow, a spokeswoman for Alaska Gov.Sean Parnell, had no immediate comment on the deci-

sion but said the Department of Law would prepare aresponse.

State unsuccessfully suedThe state unsuccessfully sued to overturn the listing

of polar bears as a threatened species and is suing tooverturn restrictions on commercial mackerel and codfishing in the western Aleutian Islands aimed at protect-ing endangered Steller sea lions.

Rebecca Noblin, an Anchorage attorney for theCenter for Biological Diversity, one of six environmentalgroups that intervened in the case, said Lambeth’s belu-ga decision shows the state is wasting taxpayer money ona frivolous challenge.

“It’s clear that a species that has dropped from 1,300to less than 400 is in danger of extinction,” she said. “It’snot surprising the court upheld NFMS’s decision.”

Cook Inlet stretches 180 miles from Anchorage to theGulf of Alaska.

Beluga whales, which can reach 15 feet long, are ahigh-profile species. The white whales feed on salmon,smaller fish, crab, shrimp, squid and clams. In late sum-mer, belugas often can be spotted from highways leading

from Anchorage, chasing salmon schooled at streammouths.

The Cook Inlet population dwindled steadily throughthe 1980s and early ‘90s, Lambeth wrote, and the declinewas accelerated between 1994 and 1998 when AlaskaNatives harvested nearly half the remaining 650 whalesin only four years.

Controlled hunting tried firstThe National Marine Fisheries Service initially deter-

mined that controlling subsistence hunting would allowthe population to recover. But in October 2008, after asecond listing petition had been filed, the agencydeclared belugas endangered. The state sued andEscopeta Oil Co., which has drilling interests in CookInlet, intervened in the case.

The state argued that belugas were already protectedby other environmental laws and that the fisheries serv-ice failed to consider state conservation programsdesigned to improve the habitat and food supply of belu-gas.

see BELUGA STATUS page 9

Contact Eric Lidji at ericlidji@mac.com

By WESLEY LOYFor Petroleum News

I f Alaska really wants a natural gaspipeline, the state probably has the

financial muscle to make it happen.The question is how much of an

appetite it has for risk.Those are two of the main thoughts

conveyed in a recent background paperfrom the Alaska Natural GasTransportation Projects Office of theFederal Coordinator.

The eight-page paper(http://bit.ly/tPJ0Es) is a clear-eyed lookat some of the state’s options for realizinga gas line, construction of which has longbeen a top economic development priorityfor Alaskans — and one of their greatestfrustrations.

The paper also details what hasbecome of the extraordinary wealth gener-

ated thus far from Alaska’s original petro-leum megaproject — the 800-mile trans-Alaska crude oil pipeline, in operation for34 years now.

Staggering figuresJuneau economist Gregg Erickson and

Larry Persily, the federal coordinator, co-authored the background paper, titled“State fiscal options to help move Alaskagas.”

They open with a couple of questions:“What could the state do to help the eco-nomics of a large volume natural gaspipeline from the North Slope toout of state markets, combined with asmaller in state line to serve Alaska’senergy needs? And should the state doanything?”

The paper then establishes Alaska’sstaggering financial wealth resulting fromits bread-and-butter petroleum industry.

“Since 1977, when North Slope crudefirst flowed down the trans Alaskapipeline, the state has collected $103.5billion in oil revenue,” the paper says.

This has allowed Alaska to build a rarecushion for itself, the writers observe.

“No state in the union, and only a fewsovereign nations, can boast theper capita financial assets accumulatedby Alaska,” the paper says. “As of June 30,2011, the state held $55.5 billion (over$78,000 for every resident) in the AlaskaPermanent Fund, Constitutional BudgetReserve Fund and other savings accounts.If Alaska truly wants a gas line(s) tobecome a reality, it likely has the means tohelp make it so.”

Where did the money go?The paper features a simple pie chart

(reproduced here) showing how Alaskahas allocated the $103.5 billion in taxes,royalties and other oil revenue.

The chart, which Erickson prepared,shows that, broadly speaking, about 62percent has been saved or invested, withthe rest consumed for government servic-es.

“Only 33 percent,” the paper says, hasgone into real productive assets — nonfi-nancial investments that increase futureproductivity. These investments includeinfrastructure such as roads and airports,or education and job training.

Another 18 percent has gone into theAlaska Permanent Fund. Fund profitsfrom stock, bond and real estate invest-ments support a popular annual “divi-dend” for state residents. This year’s divi-dend was $1,174 per person.

Finally, 10 percent of the state’s oil rev-enue has been allocated to three “rainyday” accounts, including theConstitutional Budget Reserve Fund.

How to deploy the state’s billions “hasbeen a continuing issue for Alaskans,” thepaper says, noting that staking a gaspipeline could yield significant new rev-enue, jobs and other rewards.

The writers suggest the smartestapproach would be to pursue a large gasline for the Lower 48 market together witha smaller, local line.

“The public benefits of marryinglarge pipeline economies of scale and aspur pipeline supplying in state needswould be gas delivered to Alaskans at thelowest cost while also producing muchgreater tax and royalty revenue,” the papersays. “Under the state’s existing tax and

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� N A T U R A L G A S

$103.5 billion and aiming for moreBackground paper illustrates Alaska has ample money to jump-start a long-coveted natural gas pipeline. But does it have the nerve?

Permanent Fund

Education

Infrastructure

CBRF, reserves

Government services

Live-off-the-income investments

18% Consumption

38%

Real productive asset investments

33%

Rainy-day savings 10%

How Alaska allocated $103.5 billion in oil revenue (collected FY 1977 through FY 2010)

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see GAS PIPELINE page 9

royalty structure, public revenues wouldbe seven times higher under such a combi-nation than from a stand alone, smallerin state gas line.”

Some state optionsWhile very rich now, Alaska is under

pressure because of the decline in thestate’s oil production and the maskingeffect of high crude prices, the writersnote.

“Given the longstanding concern overthe state’s unbalanced and unsustainableeconomy,” the paper says, “why hasn’tAlaska chosen to invest more of its oil rev-enue in long-term, productive assets totake up the slack when the state feels thepinch from declining oil?”

The paper outlines eight approachesthe state could take to financially assistgas line projects. Among the ideas:

• Provide direct subsidies. The statealready has pledged $500 million under a2007 law, the Alaska Gasline InducementAct, for a proposed project involvingAGIA licensee TransCanada and partnerExxonMobil. But that project currently is“high-centered,” the paper says, asTransCanada struggles to sign up cus-tomers for its line.

“The state could build on the AGIAmodel by offering a substantial direct sub-sidy in return for further commitments bythe licensee, including commitments toproceed to actual construction,” the papersays. “But this could prove very costly tothe state, in that it’s likely any pipelinedeveloper would require significant sumsof state dollars to start ordering steel pipefor a project lacking enough shippers topay the mortgage.”

• Make an equity investment. The statecould own a North Slope gas pipeline out-

right, using its “solid credit rating” to bor-row the billions of dollars it would take tobuild even a smaller, in-state line.

“But there are risks to the state,” thepaper says, including a possible credit rat-ing downgrade for adding hugely to the

state’s existing debt.• Defer gas production taxes. Deferring

production taxes during the early years ofa gas line project would allow North Slopeproducers quicker recovery of their invest-ment, and lessen their risk if gas prices

were low at the outset.“Less risk makes a project more attrac-

tive to them,” the paper says, adding: “Ifthe state expects to be cash rich with oildollars when the gas line starts flowing,Alaska may be in a good position to deferits gas production tax receipts until later.”

• Add to the existing loan guarantee.Congress already has authorized a federalloan guarantee on up to $21 billion of debtfor a Lower 48 gas line. Because thepipeline cost has escalated to $30 billionor more, the state could offer an addition-al loan guarantee to cover the difference.

• Make a shipping commitment. “As aroyalty owner of approximatelyone eighth of North Slope gas, and as therecipient of production tax revenue, thestate could consider taking its royalty gasin kind and also taking its production taxin kind (instead of a check from the pro-ducers) and signing shipping commit-ments equal to its share of the gas flow.”

This would shift some of the risk fromthe producers to the state with respect topossible low gas prices and constructioncost overruns, and this “could help tip thebalance on a pipeline.” �

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 9

The Nature Conservancy715 L Street . Suite 100 . Anchorage, AK 99501 . alaska@tnc.org . 907-276-3133 . nature.org/alaska

Lynden Family of Companies McKinnon & Associates, LLCNANA Development CorporationNorthern Economics, Inc.Oasis Environmental, Inc. Pacific Star Energy Shell Exploration & Production CompanyStaser Consulting Group, LLC Stoel Rives, LLP Trident Seafoods CorporationUdelhoven Oilfield System Services, Inc. XTO Energy, Inc.

Corporate PartnersABR, Inc.Accent Alaska.com-Ken Graham AgencyAlaska Business Monthly Alaska Rubber & Supply, Inc.Alaska Steel CompanyAlaska Wildland Adventures Alyeska Pipeline Service Company American Marine Corporation Arctic Slope Regional CorporationArctic Wire Rope & SupplyBristol Bay Native Corporation Calista Corporation

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© O

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Lambeth said most of the efforts citedby the state address larger conservationgoals and have only incidental effect onthe beluga’s chance for survival. Otheraspects of state plans were unfunded, henoted.

The state said the listing would detercommercial fishing, oil and gas explo-ration, and tourism, and could affectoperations at Alaska military installa-tions. The state claimed the fisheriesservice disregarded and failed to properlyrespond to information the state providedregarding stability of the population.

Consultation requiredLambeth rejected the state’s arguments

and said the state appeared to be express-ing its disagreement with the fisheriesservice’s results rather than the processthe agency used.

“The record amply reflects, however,that the service considered the statutoryfactors and articulated a rational responsefor its listing determination, groundedthat decision in the best scientific dataand provided a full opportunity for publiccomment before publishing its finalrule,” he wrote.

The listing means federal agencies,before issuing commercial permits, mustfirst consult with the service to determinepotential harmful effects on the whitewhales.

The state also objects to the agency’sdesignation of 3,013 square miles ofCook Inlet as critical marine habitat forbelugas. The designation excludes thePort of Anchorage. The judge did not ruleon that separate issue. �

continued from page 7

BELUGA STATUS

ALASKA GAS PIPELINE PROJECTS

Boundary Lake

Fort Nelson

Whitehorse

Watson Lake

Edmonton

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Juneau

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Fairbanks

Valdez

Anchorage

Prudhoe Bay

Point Thomson

Arctic Ocean

Pacific Ocean

Beaufort Sea

Gulf of Alaska

Great Bear Lake

Great Slave Lake

Proposed Alaska natural gas pipeline

Proposed in-state natural gas pipeline

KEYProposed Alaska natural gas pipelineProposed in-state natural gas pipelineExisting pipelines

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GAS PIPELINE

Contact Wesley Loy at wloy@petroleumnews.com

By GARY PARKFor Petroleum News

With TransCanada’s Keystone XLpipeline grounded for possibly 18

months, Enbridge is showing its Canadianrival no mercy.

It has a deal to pay US$1.5 billion forConocoPhillips’ 50 percent share of theunder-utilized Seaway pipeline from theTexas Gulf Coast to Cushing, Okla., team-ing up with Enterprise Products Partners.

If the partnership gains regulatoryapproval for its US$300 million plan, it willreverse the line by mid-2012, offering initialcapacity of 150,000 barrels per day and, fol-lowing an open season, targeting 400,000bpd by early 2013.

In addition, Enbridge and Enterprise saythey remain committed to the 800,000 bpdWrangler pipeline from Cushing to the Gulfof Mexico, which is scheduled to start serv-

ice in July 2013.“The need for additional capacity

beyond a reversed Seaway still exists,” saidan Enbridge spokeswoman, adding Seawayand Wrangler are complementary.

A reversal of Seaway would also unlockEnbridge’s 193,000 bpd Spearhead pipelinethat runs from Flanagan, Ill., to Cushing,allowing it to ship crudes from Canada andthe Bakken play to the Houston area.

Enbridge has also announced plans for

the Flanagan South pipeline to Cushing thatwould initially carry 400,000 bpd by mid-2014 and could be expanded to 550,000bpd.

No clue from State DepartmentThe assumption is that Enbridge is

poised to knock TransCanada out of theballpark, while its Calgary-based neighborlicks its wounds and ponders whether toreroute the portion of XL that crossesNebraska to avoid the sensitive Sand Hillsregion.

Whatever decision it takes, the U.S. StateDepartment gives no hint of being able orwilling to bring an approval process thisside of the US elections in 12 months.

The best TransCanada has managed sofar, as it watches Enbridge disappear overthe horizon, has been to talk about acceler-ating construction of its Cushing to GulfCoast leg as part of its goal to add 500,000

bpd to the existing 590,000 bpd Keystonesystem.

However, analysts at Wells Fargo sug-gested that phase of XL was unlikely toobtain approvals from the StateDepartment.

They said expansions of existingpipelines (such as Seaway), are “typicallymore economic than new-build pipelines(such as Keystone).”

Their research note said that of XL fallsby the wayside, Enbridge and EPP “couldpursue a larger expansion of Seaway to lev-els sufficient to balance the Cushing mar-ket,” estimating that undertaking couldreach 800,000 bpd.

“Alternatively, if Keystone XL is con-structed and fully contracted, we anticipateSea could still be expanded past 400,000bpd,” the analysts said.

Try for positive spinIn trying to generate a positive spin, Alex

Pourbaix, TransCanada’s president of ener-gy and oil pipelines, told an investor day onNov. 17 that a full Keystone system wouldprovide a growth platform for future crudeoil opportunities in Canada and the U.S.

Conceding that if the Seaway projectproceeds it could ease the crude glut atCushing, he suggested there is likely roomfor both TransCanada and Enbridgepipelines from Cushing.

“From our perspective, there’s enoughoil in Cushing for both us and Enbridge-Enterprise to compete,” Pourbaix said.

He said that on top of focusing on con-necting supply, TransCanada will concen-trate on adding new and diversified marketsfor its U.S. and Canadian producers.

In Alberta, that includes competing forprojects such as investments in storagefacilities and pipeline extensions, such asthe C$400 million Heartland extensionfrom the Edmonton region to the Hardistyhub, Pourbaix said.

TransCanada is also considering provid-ing crude services to the Fort McMurrayregion, the source of oil sands production.

As well, the company views the Bakkenarea as an excellent growth prospect andwill continue pursuing those volumes inSaskatchewan and North Dakota, while itdiscusses providing incremental accesspoints of 100,000 bpd for producers.

Amid this heated contest, Jim Williams,an energy analyst at WRTG Economics inArkansas, said the good news for producersin Canada and North Dakota is that theystand to collect a better price for their crudeif the spread between West TexasIntermediate and Brent crude futuresshrinks from its high of US$25 per barrelduring the summer. At one point afterEnbridge announced its Seaway proposalthe differential was down to almost US$9.�

10 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

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Better.

The assumption is that Enbridge ispoised to knock TransCanada outof the ballpark, while its Calgary-based neighbor licks its woundsand ponders whether to reroutethe portion of XL that crosses

Nebraska to avoid the sensitiveSand Hills region.

Amid this heated contest, JimWilliams, an energy analyst at

WRTG Economics in Arkansas, saidthe good news for producers in

Canada and North Dakota is thatthey stand to collect a better price

for their crude if the spreadbetween West Texas Intermediateand Brent crude futures shrinks

from its high of US$25 per barrelduring the summer.

Contact Gary Park through publisher@petroleumnews.com

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

Enbridge seizes pipeline openingDueling with rival TransCanada in rush to serve Texas Gulf Coast refineries; plans Seaway line reversal, keeps Wrangler on books

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 11

Committed to responsibly developing Alaska’snatural resources

By BILL WHITEResearcher/writer for the Office

of the Federal Coordinator

Japan, South Korea and Taiwan havepractically no gas production of their

own. They are far from the nearest gaspipeline. So they import LNG by tanker.

Together these three nations took 51percent of the world’s LNG supply lastyear (less than 5 percent of the world’stotal gas production).

Natural gas might be a hassle to obtainfor these nations, but gas has an over-powering allure: It’s an alternative to oil.

The case of Japan illustrates.In 1973, Japan got 77 percent of its

energy needs from imported oil and 1.5percent from natural gas, including LNGfrom a then-4-year-old plant in Alaska’sCook Inlet.

That year, the Arab oil embargo beganas the Organization of PetroleumExporting Countries flexed its muscles onthe world energy stage. Oil consumerssuch as Japan got double-whammied: oilprices soared and the reliability of theirimported oil supplies became question-able.

Japan launched a conscious effort todiversify away from oil as an energysource.

By 1990, natural gas provided 10 per-cent of Japan’s energy and nuclear 9 per-cent, according to the PetroleumAssociation of Japan, with oil’s marketshare falling to 57 percent.

By last year, Japan got 40 percent of itsenergy from imported oil, 17 percentfrom LNG and 13 percent from nuclear— the nuclear share plunged this yearafter the Fukushima disaster in March.Interestingly, coal supplied 25 percentlast year — yes, Japan is more reliant oncoal than natural gas for its energy needs;so is South Korea.

Last year, Japan imported an averageof 9 billion cubic feet of gas per day, andKorea imported 4.3 bcf/day.

Like Korea, Japan has a trickle of itsown natural gas production — about 6percent of the gas consumed in Japan. In2009, the domestic production averagedabout 500 million cubic feet a day, overdouble current production from Alaska’sCook Inlet basin.

To make their big move away from oil

toward natural gas, Japanese utilities (andthose in South Korea) made some deci-sions that continue to affect the price paidfor gas there today.

Long-term contractsOne decision involved signing con-

tracts for suppliers to provide natural gasfor periods of 20 or 25 years. The earlyLNG suppliers — Indonesia, Malaysiaand Brunei — were endowed with largegas fields, so they could guarantee long-term shipments.

This long-term arrangement helpedJapan fulfill a critical national goal: secu-rity of supply. LNG makers also got whatthey needed: long-term customers so theycould finance the huge up-front cost ofdeveloping gas fields and building lique-faction plants. Most of Japan’s LNGimports arrive under long-term contracts.

These long-term deals were satisfacto-ry to all. Buyers assumed the risk thatthey would need all the volume they werepurchasing. Sellers took the risk thatprices would remain adequate over time.

LNG tanker companies got into thisgame, too, locking their ships into theselong-term deals, keeping the vessels busyfor decades.

Linking gas price to oilAnother decision linked the LNG price

to the price of oil. At the time, gas wasreplacing oil as a fuel, so the linkagemade sense. Japanese buyers typicallyuse a formula that blends prices of vari-ous imported crude oils, a blend known inthe industry as the “Japanese CrudeCocktail,” or JCC.

Gas is often sold in units of a thousandcubic feet, while oil is sold in units of 42-gallon barrels. Because a thousand cubicfeet of gas holds roughly one-sixth theenergy of one barrel of oil, a rule ofthumb is that a thousand cubic feet of gasmight be priced at around one-sixth theJCC price of a barrel. Whether on pur-pose or by accident, that has been thecase. For example, from 1996 through2007, the average LNG price in Japanwas almost exactly one-sixth the price ofoil.

The downside of this linkage is evidenttoday, however. Oil prices lurched upwardin 2004 and 2005, and kept rising, hittinga peak in the pivotal year of 2008.

Japanese LNG prices soared alongwith oil, although not quite as fast. This

year’s high oil prices — topping $100 abarrel for most of the year — mean veryhigh LNG prices in Japan. In fact, theJapanese right now are paying the highestgas prices in the world.

Japanese utilities aren’t being passiveprice takers, however.

Some Japanese utilities and otherindustrial gas buyers have sought to rene-gotiate terms of the long-term contractsin recent years. Some are investing in

LNG projects in Australia, Indonesia andRussia’s Sakhalin Island north of Japan tosecure future supplies, the U.S. EnergyInformation Administration said in aMarch 2011 report.

The price of emergency spot LNG car-gos in Japan, as the nation replaces powergeneration lost after the Fukushimanuclear disaster, has been even higher

12 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

� N A T U R A L G A S

Asia — tight link between oil, gas pricesJapan, South Korea, Taiwan, account for 51 percent of world LNG supply; big buyers in Japan and Korea favor long-term LNG contracts

see ASIA LINK page 13

� Part 2 of 4

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than the contract LNG price. However,spot cargos remain a small fraction of theoverall LNG shipments to Japan.

Redundancy of infrastructureThe “security of supply” principle

shows up in another feature of the JapanLNG industry: The country has far morecapacity to receive and regasify LNGthan is typically found among the biggerLNG importers. This redundancy letsJapan import more gas during winter andgives the Japanese peace of mind that ifan earthquake, tsunami or even routinemaintenance take out LNG infrastruc-ture, the nation’s gas-dependent indus-tries will hum along.

The linkage of LNG prices to theJapan Crude Cocktail explains generallyhow the pricing scheme works in Japan,but digressions from the formula occurbased on a variety of factors, includingvolumes shipped, distance the LNG trav-els, and how desperately the buyer andseller need the deal.

For example, Argus Media, whichtracks the LNG market, reported that theJuly weighted average price in Japan was$16.19 per million Btu. But Japan tookLNG shipments from 13 nations thatmonth, with the price varying from $9.04for Trinidad and Tobago LNG to $17.47for Malaysian LNG. Spot cargos are sell-ing for top prices, although most ship-ments are sailing under long-term con-tracts.

The story of how LNG is priced inSouth Korea and Taiwan is similar to that

of Japan. Argus reported that Koreanbuyers paid an average of $13.36 in July.The shipments came from eight nations.The low price was $6.26 from Yemen andthe high was $17.24 from Oman.

Other Asian buyers pay less than thosein Japan and Korea for imported LNG.

For example, last January, the averageprice was $11.44 per million Btu in Japanand $10.12 in Korea. But, according toArgus, the average price was $6.40 inIndia and $5.92 in China, two nationswith significant domestic gas production,although not enough to fill all localdemand.

By September, when Japan was pay-ing about $15 for LNG, the average pricewas $10.65 in China, Bloomberg report-ed.

LNG makers aren’t selling gas toChina under the same long-term pricingcontracts as Japan. China cut some par-ticularly tough deals for its first long-term LNG buys about a decade ago.

Spot cargos are different, and LNGmakers have been asking top dollar. InJapan, the spot LNG price jumped to over$17 per million Btu in October, up from$10 in March before Fukushima. Priceshave climbed so high that some refineriesin India are switching to fuel oil ratherthan paying premiums for spot LNGshipments.

In some cases, the link between oiland gas prices in long-term contracts sets

a ceiling on the maximum oil price usedin the formula. Indonesia recently hasbeen trying to renegotiate the $38 oilprice cap in an LNG-supply contract ithas with a China buyer, according toPlatts. That cap was set in 2006 and wasa negotiated increase from the originalceiling of $25 per barrel from 2002,Platts said.

China appears to be in a particularlystrong position when it comes to gas-price negotiations. It doesn’t buy verymuch yet, but virtually all of the world’sgas exporters would like to be selling intothe world’s hottest economy. China buys

both pipeline gas and LNG, but it alsohas its own domestic production and isinvesting to boost that production.

Many analysts believe Japan andKorea will continue to favor long-termLNG contracts, with prices linked to oil.But if oil prices remain high, and nuclearpower production comes back in Japan,some softening of the gas price couldoccur. �

Editor’s note: This is a reprint from theOffice of the Federal Coordinator, AlaskaNatural Gas Transportation Projects,online at www.arcticgas.gov/print/Asia-tight-link-between-oil-gas-prices.

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 13

Many analysts believe Japan andKorea will continue to favor long-term LNG contracts, with prices

linked to oil.

continued from page 12

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By ROSE RAGSDALEFor Petroleum News

Proceedings advanced so slowly duringthe first weeks of a joint federal and

state hearing that one of the two presidingjudges spoke out to urge attorneys in thecomplex case to speed up the pace of wit-ness interrogation.

The hearing, held by the Federal EnergyRegulatory Commission and theRegulatory Commission of Alaska, beganOct. 31 in Anchorage. It concerns a propos-al by the trans-Alaska oil pipeline carriers torecover hundreds of millions of dollars ofcosts associated with ongoing “strategicreconfiguration” of the 800-mile conduit.

“We’re starting the fifth day of the hear-ing, and we’re on the second witness. So Iam going to ask the parties, have you con-sidered the possibility of waiving cross-examination of some witnesses?” FERCAdministrative Law Judge Carmen A.Cintron asked the attorneys Nov. 4.

The Commission and the RCA hadagreed for the hearing to continue for aboutthree weeks. The hearing will then recessuntil after Thanksgiving and reconvene inWashington, D.C., in late November foranother three weeks or so. Thereafter, thehearing was scheduled to reconvene inWashington after New Years for one weekbefore returning to Anchorage for a finalweek at the end of January.

In response to the judge’s question,

David Lewis of Sidley Austin, representingExxonMobil Pipeline, said: “We do notplan to waive cross-examination of any wit-nesses.”

To which, Cintron responded: “Maybeyou can surprise me later on.”

Said Lewis: “I’m sure there will be somesurprises as we go along, but I doubt thatthat will be one of them.”

“You’ve just blown my day,” repliedCintron, who presided jointly in the hearingwith RCA Administrative Law Judge DebraJ. Brandwein.

Timeliness an issueAt the start of proceedings Nov. 7,

Cintron again raised the issue of timeliness.“The commissions, both of them, and theparties are spending a lot of money in thisproceeding,” she said. “As of today, the sec-ond week of hearings, we’ve only gonethrough one witness, and we are on cross-examination of the second witness. By mycount, we are at least a week behind in the

schedule.”Cintron then asked the “TAPS carriers”

to develop a plan to get the hearing “backon track.”

Strategic reconfiguration, or SR, refersto a costly multiyear renovation and mod-ernization program initiated by thepipeline’s operator, Alyeska PipelineService Co., on behalf of the conduit’s fiveowners, BP Pipelines (Alaska) Inc.,ConocoPhillips Transportation Alaska Inc.,ExxonMobil Pipeline Co., Koch AlaskaPipeline Company LLC, and UnocalPipeline Co., in 2002.

The pipeline’s shippers and the State ofAlaska dispute how the SR costs should beallocated and that the carriers’ proposed tar-iff increases aimed at recovering these costshave not been shown to be “just and reason-able,” and they raised numerous issues intheir protests similar to concerns expressedabout the pipeline carriers’ tariff increaserequests filed in 2009 and 2010.

SR issues consolidatedThe FERC has consolidated various SR

issues in the tariff dispute with the SR phaseof the consolidated 2009 rate proceeding inDocket No. IS09-348-004, et al.

The SR costs would have a very sub-stantial impact on the pipeline’s shippingrates, related exploration and developmentactivities on the Alaska North Slope, andrevenues the State of Alaska receives fromresulting crude oil production.

“It is critical that an accurate and com-plete record be developed for the presidingjudges, this Commission, and the RCA onthe important issues presented in this case,”the FERC’s trial staff wrote in earlyOctober.

In opening statements Oct. 31, all sides

weighed in with arguments on the SRissues.

On behalf of the State of Alaska, BradleyLui of Morrison & Foerster said the caserevolves around whether the TAPS carriersprudently managed the conception, plan-ning, design and execution of the strategicreconfiguration program.

Costing more, taking longer“The SR program was originally slated

to cost approximately $252 million and wassupposed to have taken two years to per-form with completion by the end of 2005,”said Lui. “It is now currently estimated thatit will cost over three times as much, around$780 million, and is not projected to becompleted until 2014 at the earliest.”

Lui said the carriers made a “horriblemistake” by choosing an electrification pro-gram from among several options. If theyhad pursued a “hybrid” approach, the SRprogram would be essentially finished nowat a cost of $181 million.”

In his opening statement, Steven Brose,counsel for ConocoPhillips TransportationAlaska Inc. represented the pipeline carri-ers. He said SR was extensively studied,tested and vetted, dating back to 1997,before the carriers approved the option theychose.

Brose said the option was the one mostconsistent with the obligation and the stateright-of-way lease that required the carriersto use “the best available technology forTAPS.”

“SR made TAPS better day to day. Itmade it better for the long term. And itmade it better in emergency circum-stances, as we saw with the incident atpump station 1 earlier this year,” he con-cluded. �

14 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

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

FERC judge: Pick up the pace of hearingOral testimony in joint federal-state review of trans-Alaska pipeline shipping rates dispute gets off to slow start in Anchorage

Strategic reconfiguration, or SR,refers to a costly multiyear

renovation and modernizationprogram initiated by the pipeline’soperator, Alyeska Pipeline ServiceCo., on behalf of the conduit’s five

owners …

gas demand in the U.S. will be met byunconventional sources.

Meeting the demand in AsiaLocal supply will continue at a strong

pace in Asia as demand grows in thatregion, “but it’s not enough to fully meetdemand and as a result imports are goingto be required for more than a third oftheir region’s demand in 2030,” he said,mostly as LNG sourced from areas in theregion like Australia, Papua New Guineaand Indonesia.

But Asian utilities will look for diver-sity of supply and there will be competi-tion to meet the region’s growing needs.

“Now the wild card in this outlook, forboth Asia and Europe,” Kirchhoff said,“… is what happens to the unconvention-al development.”

While there is potential for unconven-tional development, in Europe it hasmoved at a slower pace than in the U.S.

“I would say in Asia developments arein a much, much earlier stage,” Kirchhoffsaid.

Opportunity for Alaska“Alaska North Slope gas is competing

in a growing and increasingly global mar-ketplace,” he said. Growing demand willgenerate strong incentives to bringresources to market, resulting “in stiffcompetition for delivering economic proj-ects.”

While ExxonMobil believes “AlaskaNorth Slope gas can play a role in meet-ing the global need for energy … it’sessential that the key stakeholders arealigned,” Kirchhoff said.

He said Gov. Sean Parnell has beenreaching out to industry, and “has recog-nized that predictable and durable fiscalterms are a prerequisite for developers inprioritizing the financial and humanresources required to bring a project ofthis scale to fruition.”

Kirchhoff said that ExxonMobil alsosees “benefit in building upon the foun-dation laid within the framework of theAlaska Pipeline Project and AGIA(Alaska Gasline Inducement Act), as wecontinue to work forward.”

Chances for Lower 48 linePersily addressed the issue of whether

there is hope for an interstate natural gaspipeline from the North Slope.

While the North American market hasproblems — the supply of unconvention-al gas currently available — the Asianmarket also has problems, he said.

“There’s competition,” Persily said,and because someone may be paying $16

per thousand cubic feet on the spot mar-ket for LNG today, there’s no guaranteethat they will pay that price for Alaska gasfor the next 30 years.

He compared the problem in Alaskatoday with a political nominating conven-tion: “Everyone in Alaska has their‘favorite son’ for getting Alaska NorthSlope gas to market. … No one’s going tocompromise; no one will walk away fromtheir favorite son; no one is willing tonegotiate; no one wins.

“It’s a stalemate,” Persily said. He listed 10 proposals to get North

Slope natural gas to market: AGIA, Asia-Pacific markets, All-Alaska line, Valdezterminal, Nikiski terminal, AlaskaNatural Gas Development Authority,trucking gas to Fairbanks, Energia Cura,stub-to-hub and Alaska Gasline PortAuthority.

Alaskans need to get behind one proj-ect, he said.

“Producers are used to dealing withsteel prices, market prices, volatility.

“Alaska politics is squirrely, let’s faceit,” he said: “Great theater; I’m not surehow productive it is.”

Cutting a dealPersily said he thinks Alaskans are

starting to warm up to the idea that tocommercialize North Slope gas they willhave to cut a deal.

He said “Alaskans need to measure thesuccess of this project not in Alaska taxdollars, but in the value of jobs, theaffordable gas for Alaskans and theinvestment it’s going to bring to Alaska,for gas and oil.”

“Alaskans need to realize that we needa gas line: we need it for the jobs, for theenergy, we need it for the development it’sgoing to bring to the state,” Persily said.

In 2005 to 2008, we thought that gaswas worth “$14 an mcf,” he said. “Well, itisn’t. You’re not going to get those kindsof prices.”

“You want to get into the market, comeup with a fiscal structure that prices thecommodity so that you can get into themarket. And then over the next 50 yearsthere will be good times in the market andyou will profit,” Persily said.

“But if you wait for that day when themarket is at its peak, you’re going to betoo late.” �

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 15

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LAND & LEASINGRamshorn has picked up TG World acreage

Ramshorn Investments has increased its acreage position in Brooks RangePetroleum Corp.-operated North Slope prospects, picking up acreage previouslyheld by TG World Energy.

Ramshorn is a Houston-based private equity company associated with drillingcontractor Nabors Industries Inc.

That reduces the joint venture partners in BRPC to two: the parent, AlaskaVenture Capital Group, and Ramshorn.

TVI Pacific Inc. said Nov. 9 that its wholly owned subsidiary, TG WorldEnergy Inc., had completed a transaction to sell its leasehold interests in Alaskafor approximately $16 million, saying at the time that it couldn’t name the pur-chaser, but that it was a party “already very active on the North Slope.” (See storyin Nov. 13 issue of Petroleum News.)

TG World Energy had been a partner in Alaska Venture Capital Group sub-sidiary BRCP since 2006.

The Alaska Division of Oil and Gas received paperwork for the sale in mid-November, showing the purchaser as Ramshorn Investment.

Ramshorn, a partner in BRPC since 2006, held 62,175 acres of state oil and gasleases prior to acquiring TG World’s acreage. TG World Energy held 36,089 acres,giving Ramshorn a combined 98,264 acres.

Division records from early November show BRPC parent Alaska VentureCapital Group with 111,125 acres and Brooks Range Development Corp. (acreageheld by former partner Bow Valley) with 22,654 acres. Bow Valley became partof the BRPC-operated joint venture in 2006, but after it was acquired by DanaPetroleum, an independent U.K. exploration and production company based inAberdeen, Scotland, Dana sold the Bow Valley acreage back to the joint venture.

BRPC has been one of the most active explorers on the North Slope in the lastfew years. It operates the Beechey Point unit in the Gwydyr Bay area of the NorthSlope, where it has been drilling since 2007, and is in the process of forming threemore units.

—KRISTEN NELSON

continued from page 3

MARKET NEEDS“Alaska North Slope gas iscompeting in a growing and

increasingly global marketplace.”—Steve Kirchhoff, vice president

of ExxonMobil Gas and Power Marketing Co.

Contact Kristen Nelson at knelson@petroleumnews.com

16 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

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

All of the companies listed above advertise on a regular basis with Petroleum News

Companies involved in Alaska and northern Canada’s oil and gas industry

AAcuren USAAECOM Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4Air LiquideAIRVAC Environmental Group . . . . . . . . . . . . . . . . . . . . . . . .5Alaska Air CargoAlaska Analytical LaboratoryAlaska Cover-AllAlaska Division of Oil and GasAlaska DreamsAlaska Frontier ConstructorsAlaska Interstate Construction (AIC) . . . . . . . . . . . . . . . . . .18Alaska Marine Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Alaska Railroad Corp.Alaska Rubber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Alaska Steel Co.Alaska TelecomAlaska Tent & TarpAlaska West Express . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Alaskan Energy Resources Inc. . . . . . . . . . . . . . . . . . . . . . .16Alpha Seismic CompressorsAlutiiq Oilfield Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . .17American Marine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Arctic Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Arctic FoundationsArctic Fox Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Arctic Slope Telephone Assoc. Co-op.Arctic Wire Rope & Supply . . . . . . . . . . . . . . . . . . . . . . . . . .15ArmstrongAspen HotelsASRC Energy ServicesAvalon Development

B-FBaker HughesBald Mountain Air Service . . . . . . . . . . . . . . . . . . . . . . . . . .13Bombay DeluxeBristol Bay Native Corp.Brooks Range SupplyCalista Corp.Canadian Mat Systems (Alaska) . . . . . . . . . . . . . . . . . . . . .19Canrig Drilling TechnologyCarlile Transportation ServicesCGGVeritas U.S. LandCH2M HillChiulista ServicesColville Inc.Computing AlternativesConocoPhillips AlaskaConstruction Machinery IndustrialCraig Taylor EquipmentCrowley AlaskaCruz ConstructionDelta P Pump and Equipment

Denali IndustrialDonaldson CompanyDowland-Bach Corp.Doyon DrillingDoyon EmeraldDoyon LTDDoyon Universal ServicesEgli Air Haul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Era Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4ERA HelicoptersEverts Air CargoExpro Americas LLCExxonMobil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Flowline Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4FluorFoss MaritimeFriends of PetsFugro

G-MGarness Engineering GroupGBR EquipmentGCI Industrial TelecomGeokinetics, formerly PGS OnshoreGlobal Diving & SalvageGolder AssociatesGreer Tank & Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6Guess & Rudd, PCHawk Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6Hoover Materials Handling GroupInspirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14Jackovich Industrial & Construction SupplyJudy Patrick PhotographyKenworth AlaskaKuukpik Arctic Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Last Frontier Air VenturesLister IndustriesLounsbury & AssociatesLynden Air Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Lynden Air Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Lynden Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Lynden International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Lynden Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Lynden Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Mapmakers of AlaskaMAPPA TestlabMaritime HelicoptersM-I SwacoMRO SalesM.T. Housing

N-PNabors Alaska Drilling . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

NalcoNANA Regional Corp.NANA WorleyParsonsNASCO Industries Inc.Nature Conservancy, The . . . . . . . . . . . . . . . . . . . . . . . . . . . .9NEI Fluid TechnologyNordic CalistaNorth Slope Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Northern Air Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Northwest Technical ServicesOil & Gas SupplyOilfield ImprovementsOpti Staffing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15PacWest Drilling SupplyPDC Harris GroupPeak Civil TechnologiesPENCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Pebble PartnershipPetroleum Equipment & ServicesPND Engineers Inc.PRA (Petrotechnical Resources of Alaska) . . . . . . . . . . . . . .2Price Gregory International

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Oil Patch BitsAKRR sets annual print events

The Alaska Railroad said Nov. 15 that it will release its 2012 annualprint and posters at three public sale-and-signing events featuring artistTaffina Katkus who will be available to sign the prints and posters.

The first event will be in Seward, Dec. 2 from 5-8 p.m., at the DaleLyndsey Intermodal Terminal. The second event will take place inAnchorage, Dec. 3 from 10 a.m.- 2 p.m., at the Anchorage HistoricDepot. The third and final event will be in Fairbanks, Dec. 10 from 10a.m.-2 p.m., at the Fairbanks Depot.

Entitled Seward Solidarity, the oil painting depicts a collage ofscenes from the railroad’s southern terminus. This is the first AlaskaRailroad annual art print to feature Seward.

The 2011 Alaska Railroad print costs $55, posters cost $30 and pins cost $5. During theAnchorage and Fairbanks events, the depot gift shops will be open to offer other items thatfeature the 2012 artwork, such as ornaments, mugs and coasters, along with other ARRC giftsand apparel.

Following the signing events, prints, posters and pins will remain on sale at the AnchorageHistoric Depot and the Fairbanks Depot, and may also be purchased online via the AlaskaRailroad Gift Shop website at www.AlaskaRailroadGiftShop.com/.

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disagreement (because) we often speak pasteach other and refuse to engage with thosewho see things differently.”

But one of her first jobs was to put a soft-er edge on what was seen as a thinly veiledthreat by Prime Minister Stephen Harper toshift Canada`s oil export focus from theU.S. to Asia.

“For the prime minister to say we haveoptions in Canada is simply a factual state-ment,” Redford told a media briefing. “It’ssimply a matter of saying we will continueto be a country that exports resources.”

At a later meeting with Ontario PremierDalton McGuinty, a frequent critic of the oilsands, she said Canada’s economic successis “dependent on exports and the prosperitythey bring, but the U.S. demand (for oil) isdeclining.”

“Asia’s star is rising and it will dominatethe 21st Century. We can guarantee nationalprosperity for a long time to come by sup-plying them with the energy they need,” shesaid.

“The reality is that Canada and Albertawill build markets and we will go wherethere are markets that are available to us. Idon’t think we’re looking at an either/or, andI never thought we were.”

However, she did suggest the Obamaadministration’s decision to stall onKeystone XL might accelerate the processof seeking out new customers for Albertacrude.

In Washington, Redford said it was nother job to lobby for XL, although she metwith some senators who are opposed to theproject.

“We are going to be very bold about

what is going on with our environmentalpolicy in Alberta. I’m not afraid to have thatdiscussion,” she said. “I have not sought outmeetings with political leaders who areopposed (to XL) for the purpose of tryingto convince them that they should be sup-portive.”

But she said it was “not the time” to aban-don XL and shift support to Enbridge’sNorthern Gateway pipeline, or any otheroptions, arguing it made the most sense forAlberta to “pursue all options simultaneous-ly.”

Redford said it was “naïve” of critics tosuggest she should have been in the U.S. ear-lier to advocate for XL.

“This is a process that must take place inthe United States,” she said. “It would nothave been appropriate for the government ofAlberta to be lobbying in that process.”

In her efforts to build support in EasternCanada for a strategy that pulls together theoil sands, the hydro power of BritishColumbia, offshore oil in Atlantic andMcGuinty’s green agenda, she said all 10provinces and three territories “must con-tribute to making this country a global ener-gy leader.”

“If we truly want to be a global energyleader, technology champion and environ-mental citizen, we have to reduce our marketdependence on the United States,” she toldthe Economic Club of Canada.

Observers believe that an alliance ofwealthy Alberta and Ontario, whichaccounts for 38 percent of Canada’s 34 mil-lion population, would be a formidable steptowards building an energy superpower.

David Taras, a political scientist atCalgary’s Mount Royal University, saidRedford is publicly “reaching out like fewrecent Alberta premiers,” showing she“knows the importance of bridge-building

and having allies. She’s someone who seesthe long-run.”

But she displayed a tougher edge as well,taking on opposition members of Parliamentfrom the New Democratic Party who havelobbied U.S. lawmakers to block XL.

She said it was not appropriate to meddle

in a U.S. domestic process and become“political activists in advising U.S. decision-makers.”

—GARY PARK

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 17

PHMSA, in 2008, said Alyeska had failed toproduce records for required atmosphericcorrosion inspections in locations such asvaults and below-ground piping corridorswhere regulators found water.

The deal also calls for Alyeska to takeother “corrective actions.”

The settlement resolves four enforce-ment cases that PHMSA had opened againstAlyeska in 2006, 2007, 2008 and 2009.

All totaled, Alyeska was facing fines of$1,293,800 in the four cases, including$263,000 the company went ahead and paidin 2010.

Alyeska was facing its largest fine,$817,000, under a case brought in 2007.

PHMSA, in that case, issued Alyeska anotice of probable violation for “at leastthree pipeline failures of TAPS.”

The alleged failures included a fire in thecontainment area of a crude oil storage tankat Pump Station 9 in which a portable heaterignited escaping oil vapors; a 900-gallon oilspill at a valve along the pipeline; and afailed operation involving a “scraper pig,”which is a device used to clean the inside ofa pipe.

PHMSA said the failures raised “causefor concern regarding the operationalintegrity of TAPS.”

Among other criticisms, the agency saidAlyeska failed to properly report the fire andfailed to follow its corporate safety manual,which requires keeping portable industrialheaters at least 25 feet away from any oil,gas or electric process facility.

In 2006, PHMSA issued Alyeska a noticeof probable violation and, after a hearingheld at the company’s request, issued a finalorder much later, in January 2010, assessingtotal penalties of $263,000.

PHMSA alleged Alyeska committed twoviolations of pipeline safety regulations.First, it was too slow to obtain a vendor’s full

report on a 2004 pig run to test for corrosionor other hazards on the pipeline, the agencysaid. Second, Alyeska failed to promptlyrepair a damaged segment of buried pipenear mile 546, PHMSA said.

In August 2010, after paying the$263,000, Alyeska sued PHMSA in Alaskafederal court, arguing among other thingsthat the fine was excessive.

As a result of the settlement withPHMSA, Alyeska’s lawyers on Nov. 17 filedpapers to have the suit dismissed.

In 2008, PHMSA issued a notice of prob-able violation to Alyeska, proposing a civilpenalty of $170,000.

The agency said inspections along thepipeline, including at road crossings, turnedup deficiencies in the company’s efforts toprevent corrosion. The case questionedAlyeska’s vigilance in using a corrosion-fighting technique known as cathodic pro-tection, and also faulted the company’srecord-keeping.

The fourth case covered under the settle-ment was brought against Alyeska in April2009, when PHMSA issued a notice ofprobable violation to the company with aproposed civil penalty of $43,800.

The notice said that during an inspection,a flange was found to be inadequate for han-dling surge pressure at Pump Station 3,allowing the release of oil onto the stationfloor.

Under the settlement, however, PHMSAwithdrew the safety allegation regarding theflange.

The $600,000 civil penalty specifiedunder the settlement stems from only two ofthe four cases involved: the 2007 case andthe 2008 case.

“We worked with PHMSA for severalmonths to reach agreement,” Alyeskaspokeswoman Michelle Egan toldPetroleum News. She said the deal closes

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REDFORD

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ALYESKA FINE

Contact Gary Park through publisher@petroleumnews.com

Contact Wesley Loy at wloy@petroleumnews.com

now plans to use the Nabors 7-ES rig tofurther deepen the well through theKuparuk C zone and do some flow test-ing. The company also plans to drill twoappraisal wells, the Mustang No. 1 andMustang No. 2, with these wells and theNorth Tarn well all being in the newlyformed Southern Miluveach unit. Inanticipation of what the company calls its“Mustang development” in the unit, thiswinter the company will also explore forsources of gravel for future roads andpads, Armfield said.

Repsol has largest programSpanish major Repsol YPF is running

by far the biggest exploration program onthe North Slope this winter — the compa-ny plans to use five drilling rigs at fivelocations in a partnership with ArmstrongOil & Gas and GMT Exploration Co.,drilling multiplewells in their494,211 acres ofstate lease holdings.

Repsol’s Alaskaoperations managerBill Hardham toldthe RDC conferenceon Nov. 16 that hiscompany has beenextremely busy gear-ing up for its winterdrilling and that the company will access itsdrill sites from a network of ice roads orig-inating at the Palm and Meltwater fields.

Four of the drilling locations are in anarea of the Colville River Delta where thecompany has applied for a new Qugrukunit, and the fifth location is calledKachemach, south of the Meltwater field.

Including sidetrack wells, Repsol is per-mitting a total of 15 wells and five pads, butHardham anticipates completing about 12

wells, and carrying out two or three drillstem tests.

The company is leasing an office inAnchorage for the winter, as well as estab-lishing a camp office in Deadhorse. And,given the intensity its exploration activity,Repsol has contracted with Alaska Airlinesfor two flights per week to the North Slopefrom Anchorage, Hardham said.

He said Repsol’s aggressive approach toexploring in its leases reflects the fact thatthe leases are set to expire within just sixyears, although establishing oil productionin Alaska as part of the company’s world-wide portfolio is also very important.

According to State of Alaska records, 84of the company’s leases expire in 2012,2013 and 2014.

Five wells for Linc at Umiat

Australian inde-pendent Linc Energyplans to drill up tofive wells in theundeveloped Umiatoil field, on the bor-der of the NationalPetroleum Reserve-Alaska, to the south of the central NorthSlope, Corri Feige, Linc general managerfor Alaska, told the RDC conference.

The company wants to conduct oil flowtesting from three or four of the wells, toobtain data for a field development plan,she said. Permitting for this winter’s drilling

is well under way. Linc will also be installing air quality

and weather monitoring equipment thiswinter, to obtain data needed for future airquality permits for oil production, she said.

The known oil resource at Umiat occursat shallow depths — Linc also sees possi-bilities for finding additional oil and gas indeeper structures at Umiat and anticipatesstarting drilling into those horizons in2012, Feige said.

Access to Umiat will be by a 90-milesnow-packed road from trans-Alaskapipeline pump station two on the DaltonHighway, she said.

On Nov. 21 Linc spokeswoman ColleenRichards told the Anchorage Chamber ofCommerce that the company is still work-ing on securing a rig for its drilling pro-gram.

Farther south in Alaska Linc is embark-ing on another program of explorationdrilling, seeking locations for undergroundcoal gasification developments in the com-pany’s state exploration license acreage inthe Healy area of the Alaska interior and inthe Cook Inlet area. The company has start-ed drilling its first test hole near Beluga onthe west side of Cook Inlet and is acquiringsome 2-D seismic data for its explorationprogram, Feige said. The company antici-pates drilling four more underground coalgasification wells by the middle of 2012,she said.

Underground coal gasification involvesusing a controlled underground coal burnto generate synthetic gas for power genera-tion, or for conversion to natural gas orother products.

Anadarko and PioneerBack in northern Alaska, Linc will co-

locate a portion of its snow packed road toUmiat with a road that Anadarko Petroleumplans to build for access to its Chandler No.1 gas well. Anadarko plans to conduct somerig-less testing of the Chandler well this

winter.North Slope producer Pioneer Natural

Resource plans to drill two wells in itsNuna development on the eastern side ofthe Colville River, in the southern part ofPioneer’s recently expanded Ooogurukunit.

Savant working on rig dealSavant Alaska wants to drill a new well

on the crest of its Red Wolf prospect in theBadami unit but is still trying to obtain adrilling rig for this project.

In a Nov. 18 email Savant Vice PresidentGreg Vigil told Petroleum News that heexpected the drilling project to move aheadthis winter and that Savant was currentlyworking a rig deal.

The Red Wolf well will target theKekiktuk formation, the formation thatcontains the oil reservoir for the Endicottfield, west of Badami.

Rig less likely for UltraStarUltraStar, a small independent Alaska

explorer, has also been looking for a rig todrill the North Dewline No. 1 well, the sec-ond well in the Dewline unit, on the coastnorth of the Prudhoe Bay unit.

At the beginning of November the com-pany notified Alaska’s Division of Oil andGas that, owing to the lack of an availabledrilling rig, it was very likely that the com-pany would have to defer its planneddrilling into 2013, UltraStar ManagingMember Jim Weeks told Petroleum Newsin a Nov. 20 email. However, the companyasked the division to continue processingits permits in case a rig comes available atshort notice, should another companychange its plans.

Great Bear waiting on permitsGreat Bear Petroleum, the company pio-

neering the possibility of source rock, shaleoil development in Alaska, hopes to drill itsfirst test wells on its North Slope acreage inthe coming winter.

Ed Duncan, Great Bear’s president andCOO, told Petroleum News Nov. 21 that heis considering severalrig options, includingthe possibility ofbringing a more mod-ern rig from theLower 48 that GreatBear thinks may bebetter suited fordrilling in sourcerock plays; a rig thatwill have to be madeArctic ready.

Duncan said that he is not going to con-tract the use of a rig until he is certain ofsecuring all of the permits he needs for hisyear-round exploration and evaluation pro-gram. Permitting is progressing well, hesaid.

The company has formed a joint venturewith oilfield service company Halliburton,in which Halliburton will do some of thetest drilling within a limited area of GreatBear’s leases.

Great Bear is permitting six wells on sixgravel pads along the Dalton Highway,intending to run short tests on at least fourwells before deciding to sanction a pilotplant. It will use a combination of rig matsand existing surface infrastructure at eachsite, Duncan said.

In Nov. 1 testimony to a special meet-ing of the Alaska Legislature’s HouseResources Committee, Duncan saidHalliburton and Great Bear each plans todrill as many as three vertical wells and alateral from each of those wells. �

18 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

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BUSY SEASON

BILL HARDHAM

CORRI FEIGE

ED DUNCAN

Contact Eric Lidji at ericlidji@mac.com

Contact Kay Cashman at publisher@petroleumnews.com

Back in northern Alaska, Linc willco-locate a portion of its snow

packed road to Umiat with a roadthat Anadarko Petroleum plans to

build for access to its ChandlerNo. 1 gas well. Anadarko plans to

conduct some rig-less testing ofthe Chandler well this winter.

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people to pay attention to Cook Inlet.” Henoted that with the exception of Escopeta-Furie, all the speakers on the RDC CookInlet panel were CIRI lessees in one formor another, “some major, some minor.”

One CIRI lessee missing from thepanel was NordAq Energy, Schutt said,noting that NordAq had a significant gasdiscovery on CIRI leases on the west sideof the Kenai National Wildlife Refuge.

Because of its subsurface holdings, hesaid, CIRI gets “an inside look at what’sgoing on in this basin.”

“And I think it can’t be overstated thatthis is a very important moment in timeand it is the early phases of a renewedinterest in oil and gas potential in thisbasin.”

He said the interest of Apache in“coming to this basin and shooting anenormous 3-D seismic program” is signif-icant because of Apache’s size and in-house technology. Schutt said he believesthat seismic shoot will result in new oilproduction in commercial volumes.

Value to stateSchutt said that in discussions of the

distinctions between the North Slope andCook Inlet, state revenues are often leftout of the equation. He said much of theremaining oil potential on the NorthSlope is on federal acreage, so if projectscan get permitted and into developmentit’s great for jobs and getting throughputinto the trans-Alaska oil pipeline, “but it’snot as great for revenue into the state gov-ernment coffers.”

“One of the places where this stategovernment can see real potential for roy-alties and taxes from oil production ishere in Cook Inlet because the oil poten-tial in Cook Inlet is in state land,” Schuttsaid.

While there is much discussion ofroads to resources on the North Slope,one thing that would really help drivedown the cost of exploration and develop-ment on the west side of Cook Inlet is aroad-to-resources road, he said.

“We can’t focus all of our efforts onprizes that are up on the North Slope andin the North Slope offshore when one ofthe things that would most benefit us herein Southcentral would be infrastructuresupporting oil and gas development here,”Schutt said.

The other thing that’s needed in CookInlet is improved port facilities on thewest side, up near Beluga and at WestForelands. Without port infrastructureand road access, it makes oil and gasexploration more difficult and moreexpensive, he said.

Unexplored potentialCook Inlet is “an amazing basin that

has, amazingly, a whole interval of geo-logical potential that’s basically neverbeen explored,” Schutt said.

Oil was found at relatively shallowdepths during early exploration, soexplorers didn’t go deep, he said.

“If you drill to bedrock in Cook Inletyou’re going to go through two or threezones of oil potential and there is a wholezone down at the bottom that has two orthree exploration wells in the entire histo-ry of the basin.”

While Cook Inlet is described as anunderexplored basin, people are talkingabout the number of wells that have beendrilled. “If you consider that there’s awhole basement to that basin that hasnever, for practical purposes, been tested,it’s even that much more potential for oiland gas development,” he said.

The need for gas in Southcentral is

well known, but Schutt said with recentdiscoveries, “we may actually have foundthe new reserves that over time will bedeveloped to get us healthy. We may haveactually turned that page in the book.”

“What we need here, to really gethealthy, is more new oil discoveries,”Schutt said. Oil is needed to feed therefinery at Nikiski, he said.

He encouraged the resource develop-ment community to work with legislatorsto figure out “how do we make this basinmore attractive until we actually get thereserves up and we get healthier again.”

He acknowledged that CIRI has a stakein this as a major land and resourceowner, but said it is something that wouldbenefit Southcentral residents and theKenai Peninsula Borough.

Cook Inlet EnergyCook Inlet Energy is a young compa-

ny, about to celebrate its second anniver-sary “of actually operating anything,” saidthe company’s president, JR Wilcox. Hesaid he and the company’s CEO, DavidHall, had helped run the assets for ForestOil and then for Pacific Energy.

2009 was pretty much the nadir for theinlet, Wilcox said, with the oil price crash-ing, the Redoubt volcano erupting andPacific Energy going bankrupt.

When people told him it was too badabout Pacific Energy, but he could alwaysget another job, Wilcox said he and Hallsaid, “no, no; we’re forming a new com-pany; we’re going to get some moneyfrom somewhere,” hire people back andstart things up again.

“Somehow that actually happened; itstill really amazes me,” he said.

Production was shut down inSeptember, he said, and by DecemberCook Inlet Energy had been approved asthe successor operator, hired a staff, and“within about two weeks we had someproduction going.” Over the next fourmonths they got production at WestMcArthur River up 400 percent fromwhere it was when the field was shut in,he said.

(See part 2 of this story, in the Dec. 4issue, for some specifics on Cook InletEnergy’s work to date.)

Inlet not there yet“There’s a lot of hustle in the inlet

now; it couldn’t be more different thanthings were in 2009,” Wilcox said. The

U.S. Geological Survey report of an addi-tional 600 million barrels of oil and sev-eral trillion cubic feet of natural gas yet tobe found is positive, he said, and there area lot of new players, “bringing a lot ofnew capital, new expertise and newenthusiasm.” He noted Hilcorp, Apache,NordAq, Buccaneer, Escopeta, Linc andArmstrong.

“We’re starting to really see a criticalmass of players of a variety of sizesfocused on a variety of different things,”Wilcox said.

But, he said, Cook Inlet oil productionis off 97 percent from peak production.

“So one shouldn’t mistake greenshoots for a crop here,” he said.

“If things seem great in the inlet nowthat’s in part just because they’ve been socrummy for so long and what we see is alot of potential and a lot of enthusiasm.”

But, Wilcox said, there’s also been a lotof potential and a lot of enthusiasm forexploration in the Arctic NationalWildlife Refuge and for a gas pipelinefrom the North Slope to market for about30 years.

“Potential and reality are sometimes along way apart from one another and it’sgoing to take a lot of time, money andeffort to turn this potential into reality.”

What’s needed in Cook Inlet?Wilcox warned against a perception

that Cook Inlet has recovered. “That’s not the case. … I think we may

have just stopped getting worse,” he said,comparing Cook Inlet to a patient whowas critical and has been stabilized.There’s going to be a “lot of effortbetween that condition and when they’reready to go out and play football again,”he said.

He said several things are needed inCook Inlet, including legislation to ensurethe preservation of marginal oil and gasproduction. Cook Inlet Energy believesHouse Bill 32 does that, he said.

And there are “real problems withaccess.”

“I think access is almost the progres-sivity of the Cook Inlet: It stands betweena lot of potential prospects and what couldbe real projects,” Wilcox said.

One access issue is a requirement forice roads, which are expensive, can’t bebuilt every winter and don’t give you verylong to get in and work when they can bebuilt.

Gravel is prohibited except by excep-

tion, he said, and “if you don’t have grav-el roads and pads it’s really hard to havean oil field.”

There is the Kenai National WildlifeRefuge on the east side and the SusitnaFlats and Trading Bay state game refugeson the west side, and there hasn’t beenmuch road and pad infrastructure addedsince they were established, Wilcox said.

Road access neededWilcox said the 28 miles linking Mat-Su

to the Beluga-Tyonek area should be “theposter child” of the roads-to-resources pro-gram.

It’s a short road across state land in apermitted right of way and has “been on thebooks since the late ‘60s,” he said.

A road on the west side “would immedi-ately lower the operating cost” for projectson the west side because you could thenaccess the area by truck.

He said it can be more expensive towork on the west side of Cook Inlet than onthe North Slope because there is a road tothe North Slope, but none to the west side.

Wilcox also said that platform abandon-ment is an issue the state needs to address.

“There’s no clear abandonment standardand … we went through this with theOsprey platform when we assumed opera-torship,” Wilcox said.

He predicted that Escopeta orBuccaneer would find the lack of clearabandonment standards a hurdle if theywere to try to put in new platforms.

And he had a comment on the oil pro-duction tax fight: A lot of the discussionaround House Bill 110 (the governor’s taxchange bill) seems premised on the mainpoint of an energy company being to paytaxes, he said.

Taxes are not what energy companiesare for, Wilcox said.

“Better than taxes are that they createjobs and they create a dynamic economy.… But even more important than the jobs isthe energy security; that’s why energy com-panies are here, is to provide energy.”

And he called on the Legislature and theadministration to continue their support forrevitalizing the inlet, to turn “this nascentrecovery into a truly prosperous oil and gaspicture.” �

See Part 2 of this story in the Dec. 4issue of Petroleum News.

PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011 19

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INLET REBIRTH

Contact Kristen Nelson at knelson@petroleumnews.com

gas production in the Lower 48 states.The company has formed a joint ven-

ture with oil services companyHalliburton, in which Halliburton will dosome of the test drilling within a limitedarea of Great Bear’s leases — Great Bearand Halliburton are each permitting threewells to be drilled from six drill sitesalong the Dalton Highway.

Needs a rigDuncan said that the company is con-

sidering several different rig options forits planned drilling. He said that, althoughhe could obtain the use of a North Sloperig, he is currently leaning toward the pos-sibility of obtaining from the Lower 48what is referred to as a “hybrid rig,” amodern rig design that can be used bothfor conventional drilling with rigid drillpipe and for coiled tubing drilling.

“We’re looking at that rig design as theway to go,” Duncan said.

Rigs of this type can operate more effi-ciently in a shale oil operation, and havinga dedicated rig would also offer theadvantage of not having to “fight the rig

market” in Alaska, Duncan said.However, a Lower 48 rig would have to

be winterized for Alaska conditions. AndGreat Bear is looking into how a rig mightbe best modularized for moving by trailerin an Alaska operation, Duncan said.

Making rig modifications and ship-ping the rig to Alaska might delay thestart of Great Bear’s drilling by a monthor two, but the efficiency of the customdesigned rig would enable the company torecoup lost time once the drilling is underway, Duncan said.

However, Duncan said that, given themillions of dollars of commitmentinvolved in contracting a rig, includingthe potential to have to pay standby dayrates, Great Bear will not close on a rigcontract without reasonable certainty ofobtaining all of the permits that it needs.

“We don’t have that kind of capital tothrow around,” he said.

Permitting challengeGreat Bear has found permitting to be

the biggest single challenge in moving itsproject forward, although the companydoes now think that the permitting is pro-gressing well, Duncan said. And theParnell administration has been helpful inclarifying issues and facilitating the per-mitting process, he said.

“We’re feeling very, very positive,”Duncan said.

Duncan said that the North SlopeBorough had made some challengingcomments on the permits but that hethought that his company has done a goodjob of addressing the borough’s concerns.The permitting process and its associatedcomment periods provide opportunitiesfor people to put ideas and agendas on thetable — Great Bear has “tried to be reallyopen from day one, being clear aboutwhat we’re trying to do,” Duncan said.Duncan said that in general Great Bearhas received positive comments on itsplans from North Slope communities.

And when it comes to environmentalimpacts, a source rock oil developmenthas some flexibility over the exact loca-

tions where wells need to be drilled —Great Bear anticipates a surface footprintof less than 0.5 percent of the land sur-face, Duncan said.

Test the rocksGreat Bear’s plan is to initially drill

vertically through the three main NorthSlope source rock intervals — theShublik, the lower Kingak and the Hueshale/GRZ — to test and sample therocks. This initial drilling would be fol-lowed by the drilling of lateral wells fromthe vertical well bores, with hydraulicfracturing then used to enable short termproduction tests. And, given that thedrilling will be done from already exist-ing gravel pads, the company hopes to beable to conduct the lateral drilling phaseof its program in the summer, to takeadvantage of the extensive daylight andsummer weather, Duncan said.

The objective of the program is to runshort tests on at least four wells, withthose tests potentially leading to the sanc-tioning of a pilot plant to more fully deter-mine the production characteristics of therocks, Duncan said. It will be necessary toobtain at least a one-year production pro-file, determining parameters such as pro-duction decay characteristics, as well asassessing the economic feasibility of oilproduction from the rocks, before makinga decision to move to full field develop-ment, he said. That sequence of eventscould lead to full-field development in2015, he said.

But the eventual timing of the develop-ment program will depend on the resultsfrom the early drilling, he said.

Great Bear sees the Shublik as itsprime target for source rock oil produc-tion, given the similarity between thatrock and the productive Eagle Ford shalein Texas. However, the company will sam-ple the other North Slope source rockintervals during its drilling program and itdoes not discount the possibility of oilproduction from either of these otherintervals as well as from the Shublik.

Duncan said that he is confident thatGreat Bear will be drilling into the“kitchen” where the source rocks are“generating oil.” The fluid pressure gradi-ent with depth will be somewhat higherthan normal, a factor also likely to sup-port effective oil production, he said.

Geologic uncertaintyBut until the company drills some

wells and conducts some tests, the poten-tial productivity of any of the sourcerocks remains unknown. And there is geo-logic uncertainty associated with likelyvariations in productivity around thesource rock play.

Great Bear is working to implement a3-D seismic program in its acreage, toreduce some of the uncertainties associat-ed with drilling, Duncan said.

When it comes to developing a shaleoil play in Alaska, Duncan sees finding askilled workforce to meet all of the workneeds as a primary challenge. He hasbeen promoting GeoForce, a program toencourage school students to pursue high-value technical careers. The program hasbeen introduced in Alaska in conjunctionwith the University of Alaska Fairbanks.

Great Bear wants to exclusively hireAlaskans, but that will be a huge trainingchallenge, Duncan said. North Slopesource rock oil development will be a 25to 30 year phenomenon — it is importantnow to excite eighth to 10th grade stu-dents on the North Slope about futurecareer possibilities close to home, he said.

—ALAN BAILEY

20 PETROLEUM NEWS • WEEK OF NOVEMBER 27, 2011

continued from page 1

GREAT BEARThe idea is to determine whetheroil can be produced direct from

those sources on the North Slopeusing the same style of horizontaldrilling and hydraulic fracturingthat has proved so successful for

unconventional oil and gasproduction in the Lower 48 states.

Contact Alan Bailey at abailey@petroleumnews.com