take more care · latest petroleum news bakken ... attempts to find a way over or around a rising...

Feige: Resources has done work, will look at what Senate passes

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

● N A T U R A L G A S

● F I N A N C E & E C O N O M Y

Vol. 18, No. 12 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of March 24, 2013 • $2

Latest Petroleum News Bakken

Petroleum News Bakken, a sister publication to Petroleum News,went to a weekly publishing schedule with its March 3 issue and, atthe same time, became a standalone newspaper, which means it is nolonger mailed with Petroleum News. But Petroleum News subscribersstill receive the online version of the Bakken newspaper each week.

Exploration season in full-swing; some work delayed

With four companies having spud eight penetrations, the

winter exploration season is under way, but some companies

have scaled back or delayed their plans for the season.

Altogether, those four companies should drill 10 or 11

penetrations this winter.

The well count is be at the low end of the early estimate

Petroleum News made in October, when permitting docu-

ments suggested that five companies could drill between 12

and 22 wells, but above the seven exploration wells compa-

nies drilled last winter.

As of March 20, Repsol E&P USA Inc. had spud three

see EXPLORATION page 18

Canada tackles wall; tankerOps tightened; rep named

The Canadian government has swung into action with

attempts to find a way over or around a rising wall of resist-

ance from First Nations and aboriginals to energy infrastruc-

ture projects and the prospect of C$100 billion being invest-

ed in British Columbia over the next decade.

With Enbridge’s Northern Gateway proposal already a

year behind schedule in the regulatory process and its grand

dreams of opening up Asian markets to Canadian crude bitu-

men from the oil sands and LNG under threat, the govern-

ment of Prime Minister Stephen Harper has decided to tack-

le concerns over marine oil spills and the risks to aboriginal

see WALL page 18

Take more careInterior review of Shell’s Arctic performance faults contractor oversight

BY ALAN BAILEYPetroleum News

On March 14 the U.S. Department of the

Interior released the report from its 60-day

review of Shell’s 2012 Arctic operations. The

review, triggered by a series of mishaps culmi-

nating in the grounding in the Gulf of Alaska of

Shell’s Arctic floating drilling platform, laid

much of the blame for Shell’s problems on fail-

ings in the company’s management oversight of

its key contractors.

“This was an area where Shell, frankly, fell

short, contributing in large part to many of the

problems Shell experienced last year, including

its inability to deploy a functioning containment

system, violation of the emission requirements

set forth in its air permits and problems with both

of its drilling rigs, including the Kulluk, which

grounded off Kodiak Island during a tow opera-

tion in the Gulf of Alaska,” said Tommy

Beaudreau, principal deputy assistant secretary

for land and minerals management, the leader of

Interior’s review team.

The review found that all phases of an Arctic

exploration program must be integrated and sub-

ject to strong management and government over-

sight, Beaudreau said.

Comprehensive planRecommendations from the review include a

need for Shell to submit to Interior a “compre-

hensive integrated plan” before resuming its

see SHELL page 14

Bill House boundRevision of oil tax scraps progressivity, ties credits to production

BY KRISTEN NELSONPetroleum News

The Alaska Senate has sent an oil tax reduc-

tion bill on to the House. Or will send the

bill, pending a reconsideration vote scheduled

March 21 after Petroleum News goes to press.

The bill passed the Senate March 20 11-9 —

with proponents and opponents both calling it

was a significant vote.

Based on Gov. Sean Parnell’s proposal, Senate

Bill 21, removal of progressivity is a main fea-

ture. Progressivity became a part of Alaska’s oil

and gas tax system with passage of ACES,

Alaska’s Clear and Equitable Share; it pushes up

the tax rate as oil prices increase.

The Senate Special Committee on TAPS

Throughput heard the bill and sent recommenda-

tions to the Senate Resources Committee. Both

the Resources and Finance committees crafted

committee substitutes; the bill was also amended

on the floor.

Senate changesSenate committees reworked the governor’s

proposal to focus more directly on benefits for

production: the base tax rate was raised to 35 per-

cent (from 25 percent in ACES) and a $5 per bar-

rel allowance for taxable production was added,

resulting in a slightly progressive tax, as the $5 is

fixed and has more value at lower oil prices than

it does at high.

see BILL page 13

Canada’s LNG tempo risesFaced with competition, inflation, BC proponents search for customers, supplies

BY GARY PARKFor Petroleum News

The crowded Canadian LNG dance floor is

starting to throb with action.

A flurry of deals and announcements have sur-

faced in the past month, some of them prompted

by a prevailing industry view that shale gas prices

have bottomed out, giving some encouragement

to LNG proponents, and others driven by the fear

that Australia is quickly outpacing the Canadian

proposals.

Activity is also being spurred on by growing

talk of possible cost inflation, which could see

British Columbia’s hopes of liquefying 6 billion

cubic feet per day shrink to 2 billion to 4 billion

cubic feet per day as the price of materials and

limited labor soars.

And the more haste the players demonstrate

the better their chances, as several speakers told a

Canadian Energy Research Institute conference

in Calgary March 11 and 12.

Seen as Canada’s chief rival in the LNG race

to Asia, Australia has three LNG projects in oper-

Chevron Chairman and Chief ExecutiveOfficer John Watson said his company

will strive for oil-linked pricing and willnot make final decisions unless projects“have economics that support the costs

that are going to be incurred.”

see LNG page 19

2 PETROLEUM NEWS • WEEK OF MARCH 24, 2013

Petroleum News North America’s source for oil and gas newscontentsTake more care

Interior review of Shell’s Arctic performance faults contractor oversight

ON THE COVER

SIDEBAR, Page 14: Kulluk being picked up from Dutch harbor

Alaska’sOil and GasConsultants

GeoscienceEngineeringProject ManagementSeismic and Well Data

3601 C Street, Suite 1424Anchorage, AK 99503

(907) 272-1234(907) 272-1344

[email protected]

SIDEBAR, Page 14: Report reviews Shell contractor supervision

Bill House bound

Revision of oil tax scraps progressivity, ties credits to production

Canada’s LNG tempo rises

Faced with competition, inflation, BC proponents search for customers, supplies

Exploration season in fullswing; some work delayed

Canada tackles wall; tanker ops tightened; rep named

ENVIRONMENT & SAFETY5 NOAA whale project raises some hackles

North Slope Natives say they need an involvement indefining “biologically important areas” in the Beaufortand Chukchi seas

11 Will ships sail directly over the pole?

An intriguing new analysis of Arctic Ocean sea iceprojections says ‘unprecedented’ navigational routescould open by mid-century

ENVIRONMENT & SAFETY

17 US drilling rig count jumps 24 to 1,776

17 US crude supplies down by 1.3M bbl

4 Ion Geophysical conducts in-ice Beaufort Sea survey

FINANCE & ECONOMY8 Buccaneer counters Archer

Claims international drilling company should pay $30 million in lost revenue for delays related to Endeavour jack-up drilling rig

10 Bipartisan revenue sharing bill offered

Alaska’s Murkowski teams with Louisiana’s Landrieu on legislation to give coastal states 37.5 percent of offshore energy revenue

3 Oil tax bill headed to House Resources

Committee heard House version earlier in session, Feige says they’ve done background on issue, will look at what Senate passes

GOVERNMENT

12 A new way of assessing wildlife takes

4 Heavy lifting over, wrestling begins

LAND & LEASING6 State approves Badami expansion

Approval adds portions of two AVCG leases overlying East Mikkelsen prospect, but leaves five additional leases out of expansion

7 IState denies Kenai Loop unit

NATURAL GAS8 RCA comments on proposed AGDC bill

Sponsors present bill to Regulatory Commission of Alaska, asking for comments; and to Legislature’s Joint In-State Gas Caucus

9 Senate passes LNG trucking bill

$275 million financial package goes to House; Ray Latchem moves ahead on LNG project, suggests role for state involvement

13 Murkowski tries again on park pipeline

● G O V E R N M E N T

Oil tax bill headed to House Resources Committee heard House version earlier in session, Feige says they’ve done background on issue, will look at what Senate passes

BY STEVE QUINNFor Petroleum News

The oil tax reform bill is back in

House Rep. Eric Feige’s court.

The Republican from Chickaloon is in

his second term as co-chair of the House

Resources Committee and long an out-

spoken proponent

calling for oil tax

reform that he

believes needs to

happen if Alaska is

to compete globally

for industry invest-

ment.

Two years ago,

Feige’s committee

helped craft the

House version of

House Bill 110, but the Senate refused to

act on that bill last year, so the Legislature

and Gov. Sean Parnell started over with

Senate Bill 21 and HB 72.

Feige held a few hearings on HB 72,

then announced his committee would

review other bills while the Senate han-

dled SB 21.

While the Senate began debating its

version and subsequent amendments,

Feige spoke to Petroleum News about

what’s next and committee accomplish-

ments thus far.

Petroleum News: You made a decisionawhile back to work with the Senate’sversion of the oil tax bill, even thoughyou’ve held a series of hearings. Are youstill OK with that and what drove thatdecision?

Feige: I’m fine with it. I don’t think it

was a question that the House will pass a

tax reduction. The question was whether

the Senate will get 11 votes. When they

do, we’ll proceed to do our part with the

bill.

Petroleum News: Are you satisfiedwith the progress so far?

Feige: Yes.

Petroleum News: What do you likeabout it?

Feige: It retains the net profits system.

I think what they did with the $5 barrel

exclusion and getting rid of progressivity

has done a lot to simply make the rate

essentially a flat tax across all price

ranges. It will make it easier for the com-

panies to make solid investment deci-

sions. One of the things that came out in

our hearings on HB 72, what impressed

most or all of our members was BP’s

presentation on depending in what order

you do the calculations, you get a differ-

ent result. I don’t think anybody ever

intended to do that when they wrote

ACES the first time. That’s the collateral

damage, one of the unintended conse-

quences of writing the bill that way. If

you do it in this order, you get this result.

If you do it in that order, you get that

result. How is a company supposed to

plan and make good investment decisions

or make decisions at all, if they can’t pre-

dict what the outcome is going to be?

Progressivity as a whole was problematic

in that regard.

Petroleum News: So let’s talk aboutthe complexities of a tax system. One ofthe complaints is the current system is toocomplex. But now there is a sliding scaleapplied to the prospects of a gross rev-

enue exclusion. Do you think you’re get-ting back into something else that is toocomplex?

Feige: No. I’d certainly like it to be

simpler, but I think to keep the votes

intact, you’re going to have to retain a

certain level of complexity. I don’t think

anybody has been able to figure out a way

to make it truly simple other than diving

off a cliff and just making it a flat gross

tax.

Petroleum News: Has that been kickedaround?

Feige: You know, in theory it’s been

talked about. That’s one of those things

that becomes an unknown There is

always a certain resistance to jump off

into the unknown.

Petroleum News: So when the billlands in your committee, do you pick upwhere you left off in any way? Or do youpick up SB 21 in its entirety?

Feige: We’ll take it and see how this

bill has changed from the

original bill. My members

are up to speed enough.

They have been following

the bill. They haven’t been

following every twist and

turn because we all know

it’s going to be different when it finally

comes off the Senate floor. But we’ll

assess what they’ve done and we’ll pro-

ceed accordingly.

Petroleum News: Do you have atimetable established for your commit-tee?

Feige: Not a specific one. I’m not

going to dawdle on it. I’d like to get this

whole process done before the end of our

regular session. That means we have to

give Finance a reasonable amount of time

to address their concerns with the bill.

I’m not going to put a specific timetable

on it, but we’re not going to let it collect

dust.

Petroleum News: Would an extra 30days help or is that prolonging an issueunnecessarily?

Feige: I don’t know that it would nec-

essarily help. There’s been an awful lot of

effort put into this bill as it is now. In a

special session, you have an awful lot of

people sitting around twiddling their

thumbs. Unless you introduce a number

of other pieces of legislation as part of the

special session, if we don’t get it done at

the end of 90 days, should we go into spe-

cial session? I’ll leave that up to the gov-

ernor. For once I’d like to go home at the

end 90 days. This would be three special

sessions in a row. Come on. Let’s get this

done and go home.

Petroleum News: Where do you strikea balance when consultants seem to thinkthere is something workable with the cur-rent version and the industry says it’s notquite enough?

Feige: Have you ever seen an oil com-

pany embrace an oil tax bill? I don’t

expect the companies to embrace it. If it

were me, I would be trying to get the

taxes down as low as possible. Sitting in

this chair, I know that’s their job, so I’ll

let them make a pitch. So

what we’re going to do

with this bill when it comes

to our committee is does it

make Alaska competitive

in the eyes of the world.

The companies will give us

some indication of that; the consultants

will give us some indication; our own

observations — the raw numbers — will

give us an indication of that. Our main

objective is to make Alaska competitive

in a way that’s as fair to all the oil com-

panies and the people of Alaska as possi-

ble.

Petroleum News: So when you sendthe bill to Finance as we’re approachingcrunch time, is there a way to begin work-ing with them ahead of time?

Feige: We will, but keep in mind they

are kind of consumed with all sorts of

other bills — HB 4 (in-state gas line bill)

right now, so I’m not going to get the full

committee’s attention, but it’s not their

job right now. We’ll reach out to a couple

individuals to help get them faster and

further up to speed and try to give them a

little bit of a head start on the bill.

Petroleum News: Moving away fromoil taxes, what do you think you’veaccomplished thus far in your committee?

Feige: The permitting was a major

piece of legislation that in a lot of little

ways that will help the progress of

resource development of projects in the

state. It’s part of the governor’s long-term

plan. Based on the vote of committees,

we support him very strongly. We passed

out HB 129 the other day that gives us

more flexibility in leasing rules and pub-

lic notice. Basically it reduces a lot of

redundant public notice and by taking

public comment on the front side of

something, it gives you an opportunity to

say, these are the public’s concerns and

these are the rules. Everybody follows

those rules. As opposed to taking public

comment and another round that the com-

panies have to react to, or even within the

same project they have to react to some-

thing new. That system generates a lot of

turmoil we don’t need to have. Let’s fig-

ure out what it is you want, make the

rules, plan and execute the project

according to the rules. Things should go a

lot smoother and a lot faster. A lot of this

stuff, the general public doesn’t perceive

it because they don’t deal with it on a

daily basis, but all of the companies doing

business in Alaska, they will perceive it.

That’s part of making Alaska more open

for business.

Take the cruise ship discharge bill; I

thought that that bill was basically a

reflection of reality. We didn’t relax any-

thing; we didn’t allow them to go to any

other kind of sewage kind of treatment

system. Really the conditions are not

going to change. This will continue to let

them operate as they have for the future. I

thought a lot of the press that came out

was somewhat misleading. It made it

sound like we were changing the rules to

allow direct discharge of sewage into

state waters. That was simply not the

case.

Petroleum News: Let’s turn to theArctic. Shell announced exploration

PETROLEUM NEWS • WEEK OF MARCH 24, 2013 3

40 Years...Thanks to our customers and employees, we’ve been privileged to serve Alaska’s oil industry for over 40 years. Our goal is to build a company that provides a service or builds a project to the complete satisfaction of its customers.

We shall strive to be number one in reputation with our customers and our employees.

We must perform safely.

We must provide quality performance.

We must make a profit.

We shall share our successes and profits with our employees.

Work can be taken away from us in many ways, but our reputation is ours to lose.

Our reputation is the key that will open doors to new business in the future.

REP. ERIC FEIGE

see FEIGE page 6


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An Ecolab Company

EXPLORATION & PRODUCTIONIon Geophysical conducts in-icebasin-wide Beaufort Sea survey

Ion Geophysical carried out its planned basin-wide 2-D seismic survey in

Alaska’s Beaufort Sea in the early winter of 2012, Ed Nelson, the company’s geo-

physical project manager, told the National Marine Fisheries Service’s Arctic

Open Water Meeting on March 7. The company completed about 1,844 kilome-

ters of seismic lines, about 25 percent of the line-mileage of the originally planned

program, Nelson said.

Nelson told Petroleum News that the reduction in the size of the survey main-

ly resulted from a commercial decision to start the survey later than originally

planned.

For the survey, the seismic survey vessel Geo Arctic, accompanied by the ice-

breaker Polar Prince, left Nome on Oct. 11, starting seismic data collection in the

eastern Beaufort Sea on Oct. 24, Nelson told the meeting. Ion has developed a sur-

vey technique involving an icebreaker and survey vessel operating in tandem,

with the seismic sound recorders towed beneath the water surface. The technique

enables surveying to take place through the sea-ice cover of early winter, after the

period of bowhead whale migration and subsistence whale hunting in the Beaufort

Sea.

After shooting a series of lines in the Beaufort, the survey vessel transited to

the Chukchi Sea between Nov. 9 and 13. Ion had planned to run a seismic line

across to the northern Chukchi Sea, to tie into a basin-wide survey that the com-

pany carried out in the Chukchi a few years ago. However, with too much winter

ice already present in the north, the vessels ran a more southerly tie-line in the

central Chukchi, completing the survey on Nov. 15, Nelson said.

—ALAN BAILEY


Heavy lifting over,wrestling beginsCanada’s Arctic communities hungry for opportunities if NWT

gains control over onshore resources, and extends pact to offshore

BY GARY PARKFor Petroleum News

A beaming Canadian Prime Minister

Stephen Harper declared that the

“heavy lifting is done” as he and

Northwest Territories Premier Bob

McLeod joined

forces to announce

the NWT had taken

a giant step towards

taking greater con-

trol over its land,

water and natural

resources.

But Harper also

made a telling obser-

vation. “It’s time for

the people of the Northwest Territories to

take control of its destiny.”

Already, the debate is in full swing

over how that will be done and who can

benefit.

Which assumes two things: That the

final transfer of jurisdiction will occur as

scheduled a year from now and that the

two governments will ultimately be able

to extend the pact from onshore resources

to possibly the ultimate oil and natural

gas prize in the offshore.

But this is no time to delay, especially

for the people of Inuvik on the Mackenzie

Delta and Tuktoyaktuk on the shore of the

Arctic Ocean, who have spent decades

watching hopes dangled and snatched

away.

Inuvik, with 3,500 residents, and

Tuktoyaktuk, with 900, are both heavily

dependent on social support programs

and resilient when it comes to living with

unfulfilled promises.

Their rollercoaster ride has largely

involved plans to develop the natural gas

resources of the Mackenzie Delta and, to

a lesser extent, the considerable oil finds

in the Beaufort Sea.

Two signatures absentAlso hanging over the “consensus”

agreement is the absence of signatures

from two of the NWT’s seven aboriginal

governments, although McLeod is opti-

mistic the Dehcho First Nation and the

Akaitcho Territory Government will join

the pact.

In addition, the agreement has yet to

face the court of public opinion during an

upcoming round of public consultations.

The history of northern development

when it depends on unanimity suggests

only one thing: Take nothing for granted.

Even so, the bidding for a slice of the

economic pie is under way.

“First we need to

be ready — really

ready — to take

advantage of the

economic opportuni-

ties that will be

available through

offshore exploration,

development and

p r o d u c t i o n , ”

Tuktoyaktuk Mayor

Merven Gruben told an Arctic oil and gas

symposium in Calgary in a speech deliv-

ered by consultant Doug Matthews.

“The opportunity is great but so is the

ability of the Mackenzie Delta region to

seize that opportunity,” he said, noting

that his hamlet and the region is being

developed as “the base for the Beaufort, a

core supply and service base for offshore

development for years to come.”

Gruben said the Canada North

Development Agency, supported by the

Inuvialuit Regional Corp., is working on

a plan that would make Tuk Harbour an

integral part of that exploration.

Add to that the federal money being

provided for a C$200 million for a C$300

million, 85-mile, year-round highway

between Inuvik and Tuktoyaktuk, ending

the reliance on an ice road, barges and air

transport when the road is completed in

2017.

Imperial-BP JV, ChevronThe new buzz of excitement stems

partly from plans by an Imperial

Oil/ExxonMobil-BP joint venture, which

expects to file an application in June to

start an environmental impact assess-

ment, followed by a separate application

to the National Energy Board, setting the

stage for a well in the Beaufort.

BP made a successful bid of C$1.18

billion for its parcel, while

Imperial/Exxon acquired rights for

C$585 million, before the companies

see NWT page 5

STEPHEN HARPER BOB MCLEOD

● E N V I R O N M E N T & S A F E T Y

NOAA whale project raises some hacklesNorth Slope Natives say they need an involvement in defining “biologically important areas” in the Beaufort and Chukchi seas


The question of how to meld the per-

spectives of western science and tra-

ditional Native knowledge when address-

ing environmental issues in the Arctic

offshore of northern Alaska is a perennial

topic of discussion at the Arctic Open

Water Meeting which NOAA’s National

Marine Fisheries Service, or NMFS,

organizes each year. During this year’s

meeting the question of traditional

knowledge use came to the fore once

again when, on March 6, NMFS present-

ed some preliminary results from an exer-

cise to develop what it terms “biological-

ly important areas” for three species of

whale found in the Alaska Arctic.

The objective of the meetings is to

bring together the various stakeholders in

the Arctic offshore, including govern-

ment regulators, oil industry officials and

people from the North Slope communi-

ties, to review industrial activities in the

Beaufort and Chukchi seas during sum-

mer Arctic open-water seasons. But, as an

adjunct to NMFS’ annual exercise of pro-

cessing authorizations to industry for the

minor, unintended disturbance of marine

mammals, the meetings also provide

opportunities to discuss approaches to

marine mammal protection.

MapsIn explaining the biologically impor-

tant areas concept, Megan Ferguson, a

research fisheries biologist in the

National Marine Mammals Laboratory,

said that a working group, a part of a

NOAA program to investigate human

impacts on marine mammals, had devel-

oped a draft suite of maps depicting

whale feeding areas, breeding areas and

migration corridors, based on data

gleaned from scientific literature; pub-

lished or unpublished scientific data; and

expert knowledge. Information used

included data about whale sightings,

whale tagging data, genetics and histori-

cal whaling records, Ferguson said.

The working group that produced the

maps consisted of 25 technical experts

from NOAA, the U.S. Navy, the Bureau

of Ocean Energy Management, the

National Park Service, academia and

three environmental consultancies,

Ferguson said. And as a starting point

regional experts took their “best stab at

drawing polygons on a map” to define the

whale habitat areas, she said.

Whale feeding areas include the

Barrow Canyon in the extreme northeast

of the Chukchi Sea, where the animals

tend to congregate every year, and a

broader region encompassing much of the

Alaska Beaufort Sea, a region that

includes a series of more transient feed-

ing areas, used by the whales in some

years but not in others, Ferguson said.

Draft productThe idea is to deliver a draft product,

as a starting point, and to then invite com-

ment and critique of the product, to

enable the eventual development of

something that can “be useful for trying

to understand the effects of human activ-

ities on these animals,” Ferguson said.

NOAA is publishing the maps and

accompanying information on its website

at cetsound.noaa.gov as a means of glean-

ing public comments. Ferguson also said

that she had been in contact with the

North Slope Borough, in part to deter-

mine how to incorporate traditional

Native knowledge into the product.

“I don’t know what is the most effec-

tive way to get that traditional knowledge

into this information, and I’m very inter-

ested in figuring out how to do that,”

Ferguson said.

Ferguson also commented that one

goal of the mapping initiative is to pro-

duce a tool that can be used in the man-

agement of the offshore.

“Ideally we want these tools to be

applied to NOAA decision making,” she

said.

Community concernsA number of people from North Slope

communities who were scattered among

the audience in the packed meeting room

in the Egan Center in Anchorage

remained silent during the talk, but lined

up to comment during the ensuing ques-

tion and answer session.

One resident, clearly frustrated at what

he saw as an absence of traditional

knowledge in the NOAA analysis,

remarked on the apparent absence of any-

one from the North Slope communities in

the NOAA working group.

“Why is that?” he asked. “Get some-

body on board and we’ll be able to help

you guys along.”

Patsy Aamodt, a member of the

Inupiat Community of the Arctic Slope, a

Native tribal organization, said that she

had been alarmed by what she had heard,

especially given the statement about the

possible use of the maps as a manage-

ment tool.

“The perception that I get (is that)

those of us from the Arctic are looked at

as if we have no expertise, no experience

and no credibility regarding our environ-

ment,” she said. “And it might be that we

don’t have everything nicely written in

black and white on a sheet of paper that

we can provide as documentation of our

expertise, but I would hope that the peo-

ple who are doing the research will take

seriously the comments that have been

made by those of us who live in the Arctic

year round, and the knowledge that we

have that has been passed on from gener-

ation to generation.”

Ferguson re-iterated that the working

group is contacting the North Slope

Borough with a view to tapping into tra-

ditional knowledge.

Can be successfulRhonda Sparks, regional coordinator

for the Alaska Nanuuq Commission, com-

mented on the success that her commis-

sion has seen when incorporating tradi-

tional knowledge into a polar bear co-

management plan that her commission

was working on with Russia and the U.S.

Fish and Wildlife Service. Traditional eco-

logical knowledge is very important she

said.

“We’re making management decisions

based on it,” she said. “It complements

western scientific studies. … There’s a

solution.”

Understanding impactsDuring her talk, Ferguson said that the

biologically important areas initiative had

originated from a NOAA commitment in

2010 to take a multifaceted approach to try

to understand the impacts of human activ-

ities on marine mammals. That commit-

ment had taken shape in the form of work-

ing groups for the compilation of informa-

tion and the creation of products that

would help in the understanding of the

spatial distribution of animal populations.

An understanding of marine mammal

population distributions becomes particu-

larly important to NMFS in assessing how

many low-level whale “takes” — non-

harmful disturbances — an industrial

activity such as seismic surveying or

drilling might cause. The estimated num-

ber of takes would be some product of the

intensity of the sound that the activity

transmits through the ocean waters, the

sound duration and the densities of the ani-

mal populations.

But when a NOAA working group

began investigating whale population dis-

tributions it realized that it would be nec-

essary to consider the behavior of the

whales, identifying areas where the ani-

mals tend to congregate at certain times of

the year, Ferguson said. And that realiza-

tion led to the initiative to identify biolog-

ically important areas, she said. ●


formed a joint venture.

Bharat Dixit, the NEB’s technical

leader for exploration and production,

said at the Arctic symposium the regu-

lator expects Chevron will also seek a

drilling permit for its adjoining lease,

which carries a work commitment of

C$103 million.

Chevron has so far gathered 2,370

square miles of “high quality” 3-D seis-

mic data on its Sirluag acreage, shoot-

ing at depths of 2,600 feet to 5,900 feet.

Kevin Williams, exploration manag-

er for Chevron’s Canadian unit, gave an

added prod to those communities eager

to provide a back-up role.

He said logistics were a “big chal-

lenge” for Chevron’s seismic work “as

there is no deepwater port in the north,”

compounded by the costs of fueling

vessels and keeping emergency medical

and evacuation services on standby.

“There are not a lot of easy solu-

tions,” Williams told the symposium.

He also said that although the regu-

lators are “fairly reasonable people,”

both operators and regulators are faced

with an area that does not have a long

track record or history.

“Really early engagement is critical

— the earlier the better. This allows you

to have a kind of dialogue and allows an

education process to happen in both

directions,” he said. ●

continued from page 4

NWT

delays as the Kulluk gets repaired. Whatare your thoughts on that developmentand Arctic exploration?

Feige: It was an unfortunate incident

with the Kulluk, but it was unfortunate

because of a mechanical failure. That was

the drillship to be the backup to the Noble

Discoverer. Now it appears the Noble

Discoverer has mechanical issues. If you

don’t have drillships, you can’t drill. They

will adjust and come back in 2014. I do not

doubt the will of Shell to continue working.

They had an unfortunate setback. That’s

life and you drive on.

Petroleum News: On to HB 4. It seemsthat this debate has gone public with ads onTV and in newspapers. Is the public gettinga fair presentation of the debate and theissue?

Feige: I’ve only seen the newspaper ads.

The City of Valdez is advocating for some-

thing that they want. They are welcome to

go forth and make their opinion known.

Petroleum News: Do you believe therewill be any meaningful progress to advanceany gas line project this year?

Feige: I believe there will be. The com-

panies have been steadily moving forward.

I think the companies are waiting to see the

results of the oil tax debate. That will affect

the economics of their decision. Other than

that, there are a lot of little details to be

wrapped up before they come out with an

announcement. I expect they will continue

to wrap up those details.

Petroleum News: Let’s say there is an oiltax bill passed this session. Would it then betime to come back to discuss long-term fis-cal certainty the industry has sought?That’s an issue that’s been hanging over thestate’s head for several administrations.

Feige: We’ll see what the industry

comes up with first. I would say one thing

at a time. We’ll deal with oil taxes first.

We’ll see where the situation is after that.

Hopefully it passes. We’ll see if they decide

on a pipeline project. Fiscal terms may be

good for that project to go forward. I think

it will be incumbent on the folks looking to

build a pipeline to come to us and say, ‘this

is what we need.’ I’m not going to specu-

late on what is possible right now because

anything is possible. I would certainly like

to see a project committed to by the end of

the calendar year.

Petroleum News: At energy council,what did you learn about the LNG energyexport?

Feige: They had some briefings on the

export markets. There were some compar-

isons worldwide to various types of energy

in various markets. It confirmed that the

market wasn’t that much different than

what I’ve heard and read up to this point.

There is a battle in terms of Lower 48.

There are a lot of industries who want to

keep the very inexpensive gas stateside and

be able to use it in manufacturing and

chemical processes. It gives those manu-

facturers a considerable advantage. If you

look at the prices of gas in various places

around the world, Henry Hub is by far the

lowest price. The reason for that is the shale

gas and the existing network of pipelines

that moves the gas all over the Lower 48.

Other places don’t exactly have that.

I’m looking at Korea, Japan and China

— maybe Taiwan — as our export destina-

tions because those are the export destina-

tions to be the most economical as far as

our ability to compete. Based on the trans-

portation distance we will have a reason-

able advantage in that kind of market.

There is a window for us. I think we are

foolish to drag on. Last week, the Japanese

were able to successfully produce methane

hydrates off the seafloor of Japan. That’s a

huge resource that’s always been limited by

the ability to convert it into something they

can use in a controlled fashion. If they can

produce that gas and do it in a commercial

manner, much like shale gas took away our

pipeline from Alaska to Alberta, it could

displace the market for Japan. So I don’t

think it behooves us to wait. It behooves us

to act sooner rather than later. ●

● L A N D & L E A S I N G

State approves Badami expansionApproval adds portions of two AVCG leases overlying East Mikkelsen prospect, but leaves five additional leases out of expansion

BY ERIC LIDJIFor Petroleum News

The Alaska Department of Natural

Resources has agreed to expand the

Badami unit to include portions of two

leases overlying the East Mikkelsen oil

prospect, but will not include an addition-

al five leases also requested for expansion

by two leaseholders.

The expansion adds some 2,204 acres

from ADL 391001 and ADL 390825

along the eastern edge of the unit, which

is currently the easternmost producing

field on the North Slope. The leases over-

lie a known Brookian reservoir in the

Killian sands tested by Humble Oil &

Refining Co. on ADL 390825 in 1971

with its East Mikkelsen No. 1 well.

With the ruling, Badami-operator

Savant Alaska LLC must drill an explo-

ration well in the expansion area next

winter. The directional well would target

the Hue Shale, allowing Savant to test the

entire Canning Formation, including the

Badami and Killian intervals.

The two leases are held by the Alaska

Venture Capital Group.

If successful, East Mikkelsen would

be developed jointly with the existing

unit.

Humble Oil drilled East Mikkelsen

No. 1 to a total depth of 15,205 feet and

encountered hydrocarbons in the Killian

sandstone interval of the Canning forma-

tion between 11,516 feet and 11,572 feet,

measured depth. A five-hour test collect-

ed 39 barrels of 24 degree API oil from

the well bore, correlating to approximate-

ly 180 barrels of oil per day.

A smaller expansionSavant originally asked the state to add

seven leases to Badami — one it held

with partner ASRC Exploration LLC and

six others held by the Alaska Venture

Capital Group — but the state ultimately

determined that only a portion of two

leases met the criteria.

In its application last November,

Savant said the seven leases would “con-

nect subsurface potential and surface

infrastructure” for the two companies. By

combining the leases into a single unit,

“drilling targets could be reached more

easily and development could occur more

efficiently and safely with less environ-

mental impact on the area,” Savant wrote.

But the state determined that only por-

tions of two leases met the criteria for

unitization.

ADL 391001 and ADL 390825 were

set to expire on Jan. 31 and Feb. 29, 2012,

respectively, but were extended by uniti-

zation proceedings. Now, the un-unitized

portion of ADL 391001 is called ADL

392392 and extended to Jan. 31, 2014,

and the un-unitized portion of ADL

390825 is called ADL 392393 and

extended to March 1, 2014.

All six Alaska Venture Capital Group

leases are also still pending to be includ-

ed in the proposed Telemark unit, which

the state said it plans to address in a sep-

arate decision.

A new phase for BadamiBadami came online in August 1998,

but geologic troubles have kept the unit

from producing as its owners once hoped.

The field reached peak production of

7,450 barrels per day in September 1998,

but former operator BP suspended pro-


judypatrickphotography.comCreative photography for the oil & gas industry.

907. 258.4704

see BADAMI page 7


FEIGE

● L A N D & L E A S I N G

State denies Kenai Loop unitClaims Buccaneer using unitization process to extend lease terms; Buccaneer plans to appeal, calling ruling ‘unprecedented’


The Alaska Department of Natural

Resources will not unitize the Kenai

Loop field, saying the “primary propose”

of the request from Buccaneer Alaska

Operations LLC appears to be “lease

extension and not the efficient develop-

ment of the unit area.”

The proposed unit would have covered

some 7,500 acres over four State of

Alaska leases, two Alaska Mental Health

Trust leases and one Cook Inlet Region

Inc. lease near the city of Kenai.

The four state leases all reached the

end of the primary term on Sept. 30,

2012, but were temporarily extended by

the unitization process. The three non-

state leases are all set to reach the end of

their primary terms in

the first quarter of

2016, but according to

the ruling CIRI has

recently terminated its

lease with Buccaneer.

In its proposed

plan of development

for the unit,

Buccaneer said it

would drill between

one and three wells

each year for five

years at Kenai Loop,

but Division of Oil

and Gas Director Bill Barron said the pro-

posal lacked detail about the wells.

Specifically, Barron criticized the devel-

opment plan for not detailing surface and

bottom hold locations.

The four state leases accounted for 19

percent of the unit. “Granting unitization

would extend the term of the state leases;

however there is no specific plan of

exploration or development on the state

land. There is no commitment to develop

state land,” he wrote.

Additionally, Barron said the plan was

“inadequate” because it was “more like a

Plan of Exploration than a Plan of

Development. Buccaneer is not commit-

ting to the development of a proven reser-

voir. It is offering to drill wells to look for

hydrocarbons.”

And because Buccaneer is the sole

working interest owner of the seven leas-

es, unitization is not necessary to “obtain

coordinated development of the leases,”

according to Barron.

Company toappeal

Buccaneer plans

to appeal the rul-

ing.

“Buccaneer has

spent over $50 mil-

lion dollars explor-

ing and developing

the Kenai Loop

leases. We have

drilled three wells,

reprocessed 2D

seismic, and shot

new 3D seismic.

We have also moved multiple leases into

production,” the company said in a state-

ment. “Given the level of activity and

ongoing production, we were surprised

by the Division’s unprecedented decision.

We are not aware of DNR ever denying a

unit application where a lessee is produc-

ing from multiple leases, has identified

additional resources within the unit area,

and has committed to expanding develop-

ment and drilling additional wells.”

To date, Buccaneer has drilled three

wells at Kenai Loop — the Kenai Loop

No. 1 discovery well, the Kenai Loop No.

3 dry hole and the recent Kenai Loop No.

4 — completed a 23.4 square mile 3-D

seismic survey over its leases and is

reprocessing data from six previous 2-D

surveys shot by various companies

between 1974 and 1982.

MHT lease producingThe producing Kenai Loop No. 1 well

is on Alaska Mental Health Trust lease

MHT 9300082 and appears to be draining

some hydrocarbons from ADL 391094.

As such, the state agreed to hold the lease

by production until it can address the

issue specifically.

While Barron denied the unit, he said

the decision did not preclude the Alaska

Mental Health Trust from unitizing its

leases, and subsequently extending its

lease terms.

According to the state, confidential

geological and geophysical data suggests

the potential for additional hydrocarbon

accumulations at Kenai Loop, but the

Kenai Loop No. 3 dry hole “shows that

another portion of the proposed unit is not

underlain by hydrocarbons.”

Although Buccaneer completed Kenai

Loop No. 4 in late 2012, the company did

not provide the state with well data,

according to the ruling. However,

Buccaneer issued a press release in mid-

February saying it brought Kenai Loop

No. 4 online on Feb. 10, 2013, and the

well was producing at a preliminary rate

of 2 million cubic feet per day.

Buccaneer applied to form the unit in

July 2012. After requiring the company to

submit additional information, the state

released the application for comments in

December.

Question about CIRI leaseAmong the reasons Barron gave for

denying the unit was the fact that CIRI

terminated its Kenai Loop lease with

Buccaneer in January, making aspects of

the application outdated.

In his ruling, Barron said that CIRI

notified the state on Jan. 9 about the ter-

mination, but said CIRI failed to provide

any explanation for its decision. In a

March 19 email to Petroleum News, CIRI

spokesman Jason Moore said, “We don’t

feel it would be appropriate to comment

on this issue at this time, other than to say

the state is not inaccurate.” Petroleum

News requested a copy of the Jan. 9 noti-

fication from the Division of Oil and Gas,

but was unable to get a copy by the time

the issue went to press.

Buccaneer officials were unavailable

to comment on the lease. ●


duction from February to May 1999,

again from 2003 until 2005 and a third

time starting in September 2007.

Savant Alaska and ASRC

Exploration joined the project in late

2008, eventually bringing the field back

into sustained production by drilling

and hydraulically fracturing additional

horizontal wells in an effort to boost

production. Savant became the operator

in late 2011.

As of January 2013, the Badami unit

had produced slightly more than 6 mil-

lion barrels of oil and 30 billion cubic

feet of natural gas. The five wells in the

Badami field were producing 214 bar-

rels of oil and 27,000 cubic feet of nat-

ural gas as of January 2013.

Among those was the Badami B1-38

well Savant drilled in 2009, completed

in early 2010 and brought online in late

2010. The well discovered the first

hydrocarbon-bearing sandstone in the

Brookian Killian interval shown to be

capable of sustained production. ●


BADAMI

According to the state,confidential geological and

geophysical data suggests thepotential for additional

hydrocarbon accumulations atKenai Loop, but the Kenai Loop

No. 3 dry hole “shows thatanother portion of the proposed

unit is not underlain byhydrocarbons.”


RCA comments on proposed AGDC billSponsors present bill to Regulatory Commission of Alaska, asking for comments; and to Legislature’s Joint In-State Gas Caucus

BY KRISTEN NELSONPetroleum News

Legislation authorizing an expansion

of authorities for the Alaska Gasline

Development Corp., the state agency

charged with developing an in-state natural

gas pipeline project, is moving in the House

and the sponsors had opportunities March

14 and 15 to discuss the bill and get com-

ments.

The Joint In-State Gas Caucus got an

update March 14 and the Regulatory

Commission of Alaska heard an overview

and responded to requests for comments on

House Bill 4 in a March 15 special hearing.

The bill, which is now in House Finance

with a first hearing scheduled March 21 as

this issue of Petroleum News goes to press,

establishes the Alaska Gasline

Development Corp., AGDC, as a separate

state entity. AGDC was authorized by HB

369 in 2010 as a subsidiary of the Alaska

Housing Finance Corp.

HB 4 also provides a number of what co-

sponsors House Speaker Mike Chenault, R-

Nikiski, and Rep. Mike Hawker, R-

Anchorage, characterize as tools necessary

to move the project forward, the project

being to move natural gas off the North

Slope for use by Alaskans.

RCA questions 30-day approvalHawker, in introductory comments to

RCA by phone at the March 15 hearing,

said the bill’s sponsors chose not to

“invade” 42.05 or 42.06, the Alaska Public

Utilities Regulatory Act and the Pipeline

Act, but instead to establish a new chapter

of statute, 42.08, for contract carrier natural

gas pipelines in the state.

The fundamental premise of that section,

he said, was to respect the rights of contract

between two unlinked parties of equal

standing while providing a strong regulato-

ry basis for consumer and state protection,

providing a framework that wasn’t overly

prescriptive, and that would require “mini-

mal oversight” from the state.

Hawker said the objective was “respon-

sible consumer oversight” without creating

“an unnecessary and excessive” regulatory

burden on contract carrier pipelines, since

by definition contract carriage is based on a

contract between two parties at arm’s length

and of equal standing.

Rena Delbridge, staff to Hawker, gave

the commission an overview of HB 4 as it

applies to RCA, and responded to commis-

sion questions.

Commissioners had questions on a num-

ber of aspects of the bill, from the reason-

ableness of a requirement that an initial

recourse rate be approved within 30 days —

Delbridge said that was the type of infor-

mation the sponsors were seeking — to

whether the bill is applicable to gas

pipelines generally — Hawker said that it

is.

Fiscal questions from legislatorsMembers of the Joint In-State Gas

Caucus heard from co-sponsors Hawker

and Chenault, and from Dan Fauske and

Frank Richards of AGDC.

Richards, AGDC manager of pipeline

engineering and government affairs,

reviewed recent changes in the project from

a high-pressure 24-inch line to a low-pres-

sure 36-inch line, and said that because

AGDC has a final environmental impact

statement from the Corps of Engineers for

the 24-inch high-pressure line, some addi-

tional work with the Corps would be neces-

sary.

Fauske, CEO and executive director of

AHFC and president of AGDC, noted that a

supplemental to an EIS is “far less onerous”

than starting over, and said that going to a

larger, lower-pressure line allowed removal

of the expensive straddle plant needed to

serve Fairbanks under the high-pressure

option. The low-pressure option, he said,

also opens up access to all communities

along the line at a nominal fee to tap into the

line.

And elimination of the $250 million

straddle plant also makes proposed tariffs to

Fairbanks lower than to Anchorage. Fauske

said it had been a sore point in Fairbanks

that under the initial plan even the proposed

Fairbanks tariff was higher than Anchorage,

although Fairbanks is farther north.

Current workRichards said current field work

includes drilling at the Yukon River to

determine the feasibility of horizontal

directional drilling for a crossing there as

opposed to a bridge.

There is a bridge, Fauske said, owned

by the state, but the hangers for pipelines

are owned by Alyeska Pipeline Service

Co. and because the trans-Alaska oil

pipeline is a strategic facility, the

Transportation Security Administration is

involved. There are concerns, Fauske

said, about whether they will let you hand

a gas line next to an oil line, and the cost

of a new bridge to get across the Yukon

would be some $50 million.

Legislators had questions about the

$400 million in state money needed for

the project, whether contract carriage

could require Alaskans along the line to

pay an export gas price and what usage

estimates for Fairbanks were included in

modeling for the tariff.

The $400 million, Fauske said, is the

money the state is investing to advance

the project and fine tune it. Once a suc-

cessful open season has been held, he

said, bonds would be sold for construc-

tion financing, and from that point on it

would be expenditures of investors, not

the state. ●



Buccaneer counters ArcherClaims international drilling company should pay $30 million in lost revenue for delays related to Endeavour jack-up drilling rig


Continuing the back and forth

between the two sides, a group of

Buccaneer Energy Ltd. affiliates and sub-

sidiaries is claiming up to $30 million in

lost revenue from Archer Drilling LLC, in

connection with the Endeavour jack-up rig

docked in Homer since fall.

In a 14-page counterclaim filed in Texas

district court on March 13, a Buccaneer

affiliate said it is losing $175,000 per day in

rig rentals because Archer mismanaged rig

upgrades, cut short its contract and now

refuses to hand over documentation

required to use the rig.

In December, after the companies part-

ed ways, Archer sued Buccaneer for $6

million in damages for late payments and

“nonperformance,” claiming that the

Australian independent and its affiliates

“undermined and underfunded” upgrades

on the jack-up.

But in its version of things, Buccaneer

and its affiliates such as Kenai Offshore

Ventures LLC and Kenai Drilling LLC

claim Archer failed to live up to its end of

the deal.

Under the deal, according to Buccaneer,

Archer could accept or decline work orders

from the Buccaneer-affiliate Kenai

Offshore Ventures LLC, but was bound to

complete any work order it accepted to the

satisfaction of Kenai Offshore Ventures

before getting paid.

“Under the work orders, Archer was

charged with project management/supervi-

sion, project engineering, cost estimating,

risk assessment, change management pro-

curement control, project reporting/plan-

ning” and other aspects of the effort to

refurbish the rig at an Asian shipyard

before moving it to Alaska, according to

Buccaneer. While still in Singapore, Archer

said it needed to complete some additional

tasks before the rig could be fully certified,

but said the work could be handled en route

to Alaska, Buccaneer said.

The rig began its journey to Alaska in

August 2012, and upon arrival “the same

Archer personnel who previously identi-

fied a short list of discrete tasks left before

certification suddenly produced a ten page

list of single-spaced line items that had to

be resolved.”

At the same time, according to

Buccaneer, Archer began “pressuring”

Kenai Drilling to finalize a “lucrative”

management contract for the rig for when it

began drilling in Cook Inlet. Although

Buccaneer negotiated “in good faith,” it

said it suspended the negotiations after

learning about the work still needed on the

rig. At that point, according to Buccaneer,

“Archer’s progress on Endeavour, while

incremental at best, slowed further.”

Paying local contractorsThis set off a period of disputed invoic-

es, where Archer, according to Buccaneer,

attempted to charge Kenai Offshore

Ventures “for work Archer was redoing.”

In its original complaint, Archer

claimed that Buccaneer rushed the rig to

Alaska, and subsequently requested work

without “the resources or the manpower”

necessary to complete it and later request-

ed work “plainly outside the scope of exist-

ing work orders.”

Additionally, Archer claimed,

Buccaneer kept hiring third parties and

telling them to bill Archer for the work.

While claiming that Buccaneer failed to

pay for its work requests, Archer said its

own employees “have been fully paid by

Archer throughout the project.”

Buccaneer blames Archer for failing to

pay local contractors.

According to Buccaneer, the two parties

eventually signed a memorandum of

understanding over the disputed invoices in

November 2012 and “Archer was paid all

amounts then due except for approximate-

ly $1.4 million in dispute.” But the debate

over paying local contractors turned public

and eventually the two sides parted ways.

According to Buccaneer, Archer decid-

ed to “unilaterally terminate” the contract,

thereby “sabotaging all ongoing efforts to

complete the rig repairs.” Buccaneer soon

hired Spartan Offshore Drilling LLC to

take over work, but the transition was com-

plicated because “Archer abandoned the

rig, removed rig documents and certificates

necessary for the vessel to be approved for

operation in Alaska, and terminated the

approximately 65 crew members that had

been employed and trained in the preced-

ing five months.” ●


Senate passes LNG trucking bill$275 million financial package goes to House; Ray Latchem moves ahead on LNG project, suggests role for state involvement


The Alaska Senate unanimously

passed a bill on March 13 to move

ahead on financing a liquefied natural gas

trucking operation from the North Slope

to markets in the Interior.

Senate Bill 23 provides up to $275

million in loans and bonding authority for

AIDEA to dispense to private partners

able to get the project operational by

2015. AIDEA is also seeking a $50 mil-

lion general fund appropriation for the

project, but lawmakers are considering

that request as part of the larger capital

budget still under deliberations.

The primary goal of the project is to

reduce the cost of energy in the greater

Fairbanks area while simultaneously

expanding distribution infrastructure in

advance of some more permanent trans-

mission system in the future, such as a

large-diameter natural gas pipeline. The

project is also meant to address chronic

air quality problems in the region.

“I appreciate the Senate’s work to

jumpstart this project and provide energy

relief for Alaskans by developing

Alaska’s gas,” Gov. Sean Parnell said in a

statement. “Our focus continues to be on

providing the lowest cost of energy to as

many Alaskans as possible. This legisla-

tion will serve as a springboard to lever-

age our abundant North Slope gas

reserves to the Interior and Southcentral

Alaska, as well as other regions of the

state.”

The bill is scheduled to appear before

the House Labor and Commerce

Committee on March 20 and the House

Finance Committee on March 21, pend-

ing a quick referral.

An alternative ideaThe financial package is meant to spur

private investment in the region.

The initial phase of the project is

expected to cost some $400 million, with

as much as $355 million coming from the

state in grants, loans, bonds and tax cred-

its, but in recent testimony, AIDEA offi-

cials also imagined a natural gas distribu-

tion system costing as much as $1 billion

at full build-out, with the majority com-

ing from private sources.

The early stage is almost certain to

involve more than one private partner,

because the entities farthest along on

project planning and permitting lack a

financing component.

The 16 responses AIDEA received to

its letter of request for interest in late

December included two turnkey projects

— from the regional electric cooperative

Golden Valley Electric Association and

from Pentex Alaska Natural Gas Co. the

parent company of Polar LNG LLC and

local distribution company Fairbanks

Natural Gas LLC.

The responses also included six com-

panies interested in engineering, procure-

ment and construction components of the

project, three financial institutions and

five responses that “did not indicate inter-

est in being a turnkey or component part

of the development.”

Spectrum among fiveAmong those five companies is

Spectrum LNG LLC, an operation run by

Ray Latchem that has been pursuing a

small scale LNG project on the North

Slope since last year.

The company has already applied for

permits from the Regulatory Commission

of Alaska, the State Pipeline

Coordinator’s Office and the U.S. Army

Corps of Engineers.

In his response to AIDEA, Latchem

questioned why the state should be

involved in a North Slope LNG project

that has already attracted interest from the

private sector.

“Frankly, we don’t understand the

exact role AIDEA is taking on, but it

appears to be responding to stakeholders

seeking subsidies,” Latchem wrote. “We

do believe that the notion of state subsi-

dies is out there amongst the market, and

therefore they have resisted Spectrum’s

sales efforts, holding out for cheaper

LNG from a free LNG plant.”

If the state is interested in lowering the

cost of energy for Alaskans, Latchem

wrote, why stop with natural gas? “If the

state were to build a third refinery in

North Pole, and treat the investment as a

give-away, certainly the cost of fuel oil

would fall,” he wrote.

Help with price, delivery pointWhile Latchem said Spectrum would

not seek public funding for its project, he

believes the state can play an important

role in any North Slope gas project by

negotiating a natural gas price that is not

tied to oil and by helping to facilitate the

best delivery point.

Concerning price, Latchem wrote,

“We believe the state could very quickly

and easily secure supply agreements with

all producers for a price much lower than

any current agreements.” As for the deliv-

ery point, he suggested using excess

capacity in the TAPS fuel gas line to save

on trucking. “Accessing the excess and

currently wasted capacity by a private

firm is a virtual impossibility. The likeli-

hood of getting all the TAPS owners to

agree to some sort of transportation

agreement with anyone but the State is

nil,” he wrote.

GVEA and Pentex have already nego-

tiated supply contracts with BP and

ExxonMobil, respectively. Although

AIDEA officials told lawmakers they

have yet to see those contracts in detail

because of confidentiality issues, they

said both contracts are benchmarked to

crude prices, but would remain cheaper

than oil even at low oil prices. ●


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Better.

Concerning price, Latchem wrote,“We believe the state could veryquickly and easily secure supply

agreements with all producers fora price much lower than any

current agreements.”


Bipartisan revenue sharing bill offeredAlaska’s Murkowski teams with Louisiana’s Landrieu on legislation to give coastal states 37.5 percent of offshore energy revenue

BY WESLEY LOYFor Petroleum News

Taking new aim at an old complaint,

an Alaska senator teamed with a

Louisiana colleague to introduce legis-

lation March 20 to give coastal states a

“fair share” of federal revenue generat-

ed from offshore energy development.

U.S. Sen. Lisa Murkowski, an Alaska

Republican, and Sen. Mary Landrieu, a

Louisiana Democrat, call their bill the

Fixing America’s Inequities with

Revenues Act.

The FAIR Act would put coastal

states on a more equal footing with

other states, the two

senators said.

While interior

states are allowed

to keep 50 percent

of oil, gas and coal

royalties and other

revenue generated

from federal land

within their bor-

ders, coastal states

such as Alaska and Louisiana receive

little from energy production on the

outer continental shelf, the senators

said.

The actual text of the bill, and a bill

number, were not available to Petroleum

News at press time.

According to news releases and other

materials from the two senators, the

FAIR Act would give 27.5 percent of all

revenue from offshore energy develop-

ment, including oil, gas, wind and other

renewables, to coastal states. States cre-

ating a clean energy or conservation

fund could collect another 10 percent,

for a total of 37.5 percent.

The bill does not open any new areas

for energy production.

‘Virtually nothing’Offshore energy development

impacts nearby states, and so they right-

fully should receive some of the rev-

enue, the senators said.

“Revenue sharing is critical for the

coastal communities that will shoulder

the increased demands on their roads,

docks and other infrastructure from off-

shore development,” Murkowski said.

“It’s only fair that these communities

share in the revenues from the resources

produced off their shores, regardless of

whether that is oil and gas or wind and

tidal energy.”

“For decades, coastal energy produc-

ing states have faced a glaring inequity

in federal energy policy that allows

onshore producing states to keep 50 per-

cent of revenues, while offshore produc-

ing states, like Louisiana and Alaska,

keep virtually nothing,” Landrieu said.

Unlike Alaska, Louisiana and three

other Gulf of Mexico oil and gas pro-

ducing states (Alabama, Mississippi and

Texas) are in line to collect 37.5 percent

of offshore revenue, under the Gulf of

Mexico Energy Security Act of 2006.

But the law won’t be fully implemented

until 2017, Landrieu’s office said. The

FAIR Act would accelerate payments,

and gradually lift the $500 million

annual revenue sharing cap for the four

Gulf producing states.

Louisiana sent $5.7 billion in rev-

enues to the federal treasury in 2011,

and received $26.7 million in return,

Landrieu’s office said.

Beaufort, Chukchi billions“I could have introduced an Alaska-

only bill, but we have purposefully

expanded this legislation to gain the

support of as many members as possi-

ble,” Murkowski said. “We know that in

this day and age, it’s a 60-vote world in

the Senate.”

Under the FAIR Act, Alaska could

rake in billions of dollars if offshore

development in the Beaufort and

Chukchi seas is successful, a press

release from Murkowski’s office said.

“These funds would help the state

and impacted coastal communities

enhance emergency response capabili-

ties and construct critical infrastructure,

such as deepwater ports, airfields and

docks,” the release said.

Landrieu said Louisiana needs bil-

lions to stop the loss of coastal lands

and protect communities from storm

surges.

In Alaska, FAIR Act revenue would

be allocated among state and local gov-

ernments, Murkowski said.

“The allocation method for Alaska

directs 25 percent of the state’s 27.5

percent share to the communities most

impacted by offshore development,” her

office said. “Ninety percent of these

funds would be allocated to the bor-

oughs closest to offshore leases. Ten

percent would go to boroughs that are

significant staging areas for offshore

development. The state would receive

the remainder of the revenue. The feder-

al government would still receive the

lion’s share of revenues (62.5 percent)

for deficit reduction.”

Begich’s billAlaska’s other senator, Democrat

Mark Begich, on Jan. 31 introduced a

bill, S. 199, that also would give Alaska

a 37.5 percent cut of offshore energy

revenue, fossil or renewable.

His bill, however, would allocate the

funds differently, with 25 percent going

to local governments, 25 percent to

Native corporations, 10 percent to tribal

governments, and 40 percent to the

state.

“I applaud Sens. Landrieu and

Murkowski for their efforts and look

forward to working together to make

sure Alaska gets our fair share,” Begich

said.

On March 13, Begich took exception

to a March 8 letter eight of his Senate

colleagues, nearly all Democrats, sent to

Sen. Ron Wyden, D-Ore., and

Murkowski, the chairman and ranking

member of the Senate Energy

Committee.

The eight senators included Robert

Menendez and Frank Lautenberg of

New Jersey, Bill Nelson of Florida,


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Will ships sail directly over the pole?An intriguing new analysis of Arctic Ocean sea ice projections says ‘unprecedented’ navigational routes could open by mid-century


Can you envision oil, gas, minerals

and other cargos traveling aboard

ships directly over the North Pole?

It’s not far-fetched.

A new analysis of sea ice projections

finds unprecedented navigation routes

opening up by mid-century, greatly

enhancing the chances for ships to tran-

sit the Arctic Ocean, whether by routes

along the coasts of Russia and Canada,

or straight across the polar sea.

The findings “have important impli-

cations for trade, environmental risk,

and evolving strategic and governance

policies in the Arctic,” says the article

published March 4 on the website of the

journal Proceedings of the National

Academy of Sciences.

The article is available at

http://bit.ly/VFy58E.

Two vessel classesThe lead author is

Laurence C. Smith,

geography professor

at the University of

California, Los

Angeles. The article

acknowledges support

from the National Science Foundation

and the National Aeronautics and Space

Administration.

Researchers analyzed seven climate

model projections of sea ice properties,

and assumed two different climate

change scenarios and two vessel classes.

The first class includes “open-water ves-

sels” with no hull ice strengthening.

Such ships are common, comprising the

vast majority of the global fleet. The

second class, known as

Polar Class 6, includes

moderately ice-

strengthened ships such

as those used today in

the Baltic Sea.

“Since 1979, satel-

lite mapping has

revealed an overall

trend of decreasing

late-summer sea ice

extent in the Arctic,

with the six lowest

years on record occur-

ring since 2006,” the article begins.

The trend is expected to continue,

leading to a seasonally ice-free Arctic

Ocean later this century, it says.

The researchers look at the optimal,

lowest-cost navigation

routes for ships seek-

ing to traverse the

Arctic Ocean between

the Bering Strait and

the North Atlantic

ports of Rotterdam,

Netherlands, and St.

John’s, Newfoundland.

Their simulations focus solely on the

peak navigation month of September,

when open water reaches its maximum

annual extent.

They examine three basic shipping

routes: the Northern Sea Route, which

goes over Russia, the Northwest Passage

over Canada, and strait across the Arctic

Ocean via the North Pole.

The findingsBy mid-century (2040 to 2059), the

region’s overall navi-

gation potential

increases substantially,

the researchers find.

The feasibility for

open-water vessels to

complete September

trans-Arctic voyages

along the Northern Sea

Route improves, with

numerous optimal

routes shifting north-

ward away from the

Russian Federation

coast, the article says. By mid-century,

the probability of a technically feasible

transit rises to 94 percent or better.

Some ships already are moving along

the Northern Sea Route, with Russia

charging escort fees to international ves-

sels, the article says.

As for navigating along the top of

Canada, the authors write that “the

Northwest Passage, arguably the most

historically famed of potential shipping

routes through the Arctic, has the lowest

navigation potential both historically

and at present but opens substantially by

2040-2059.”

The Northwest Passage is a substan-

tially shorter route to eastern North

America than the Northern Sea Route.

By mid-century, the probability of a fea-

sible transit by an open-water ship

through the Northwest Passage could

more than double to 60 percent, the arti-

cle says.

As for travel through the central

Arctic Ocean, the researchers see the

emergence by mid-century of “unprece-

dented” new optimal navigation routes

for ships with moderate ice-breaking

capability, including a “robust corridor

directly over the North Pole” to Europe.

Important caveatsThese findings “may well be conser-

vative,” as current climate models often

lag behind real-world satellite observa-

tions of shrinking Arctic sea ice cover,

the researchers note.

“We reiterate that these results reflect

conditions for peak late-summer

(September) shipping season only, and

are driven solely by projected reductions

in sea ice thickness and concentration,”

the researchers write.

They continue: “Although sea ice

currently represents the single greatest

obstacle to trans-Arctic shipping,

numerous additional factors, including

dearth of services and infrastructure,

high insurance and escort fees, unknown

competitive response of the Suez and

Panama Canals, poor charts, and other

socioeconomic considerations, remain

significant impediments to maritime

activity in the region.” ●


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Barbara Boxer of California, Richard Durbin of Illinois,

Benjamin Cardin of Maryland, and Patrick Leahy and

independent Bernard Sanders of Vermont.

Their letter said they would vigorously oppose any

effort to expand offshore oil and gas drilling into areas

where it is currently prohibited. They also said, among

other things, that sharing revenue with the states diverts

money the federal government needs to pay down the national debt, and that

passing a revenue sharing law “would be premature without reforms designed

to make the offshore oil industry safer.”

“These folks just don’t like oil and gas. That’s how I read it,” Begich said of

the letter. ●


BILL

SEN. MARK BEGICH

Their simulations focussolely on the peak navigation

month of September, whenopen water reaches its

maximum annual extent.

A new analysis of sea iceprojections finds

unprecedented navigationroutes opening up by mid-

century, greatly enhancing thechances for ships to transit

the Arctic Ocean, whether byroutes along the coasts of

Russia and Canada, orstraight across the polar sea.


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A new way of assessing wildlife takesNMFS is revisiting how to estimate how many marine mammals are impacted by the sound from activities such as seismic surveys


The National Marine Fisheries

Service, or NMFS, is in the process

of revising the criteria that it uses to esti-

mate the extent to which sound from off-

shore industrial activities such as marine

seismic surveys and offshore drilling dis-

turb marine mammals, NMFS staff told

the annual Arctic Open Water Meeting on

March 6.

Critical importanceThe acoustic disturbance criteria are of

critical importance in the process of

applying to NMFS for incidental harass-

ment authorizations, the permits that

allow the minor disturbance, or “take,” of

small numbers of animals during industri-

al operations. Without a government

authorization, a take of a marine mammal

would normally violate the Marine

Mammals Protection Act and, depending

on the species of mammal involved,

could also contravene the Endangered

Species Act.

The acoustic criteria are essential to

the calculations used to estimate how

many takes an activity might cause, and

are also used in designing mitigation

measures to avoid wildlife disturbance.

An harassment authorization will normal-

ly prohibit the exposure of animals to

sound that might cause injury and will

limit the number of minor takes allowed.

NMFS administers incidental harass-

ment authorizations for whales and seals,

while the U.S. Fish and Wildlife Service

administers similar authorizations for

polar bears and walruses. The intention is

to ensure that offshore activities do not

harm the various mammals that live in the

ocean.

New criteriaAmy Scholik-Schlomer, acoustic

coordinator with the NMFS Office of

Protected Resources, told the Open Water

Meeting that NMFS has been working on

new sound disturbance criteria for some

time, to take account of new science and

to put in place a consistent set of criteria

throughout NMFS.

“There has been a lot of new science

since our original criteria were first

derived,” Scholik-Schlomer said.

The new criteria are still undergoing

internal review in NMFS and are being

documented as a set of guidelines for

eventual publication. Before final publi-

cation, the guidelines will be subject to a

peer review and will go through a public

comment process.

“The goal is to have these guidelines

issued by late 2013,” Scholik-Schlomer

said.

Current guidelinesThe current guidelines spell out a

series of sound levels, specified in deci-

bels, at which broad categories of animal

such as whales and seals are likely to be

impacted. Depending on the level of

sound, impacts can range from minor

behavioral disturbance through tempo-

rary hearing impairment to permanent

hearing damage. Companies conducting

offshore activities are only allowed to

disturb small numbers of animals at the

lower levels of disturbance, without caus-

ing injury.

NMFS mandates two sets of sound

levels: one for impulse sounds such as

seismic shots and another for continuous

sounds, such as the noise from a drilling

rig. And, with an absence of data about

hearing loss in marine mammals, the

sound levels have been based on expert

opinion, Scholik-Schlomer said.

To assure that an activity operates

within acceptable levels of animal distur-

bance, the acoustic disturbance criteria

are used in conjunction with estimates of

sound propagation from the activity and

estimates of likely animal population dis-

tributions. Then, when conducting an

activity, a “safety circle” is defined

around the sound source, outside which

the sound level is below the relevant dis-

turbance threshold. The activity has to

stop if an animal enters the safety circle.

Estimating takesInitially, the new acoustic criteria will

only apply to the estimating of takes for

an activity, with the existing criteria con-

tinuing to be used for the time being in

the establishment of safety circles for

mitigating animal disturbance, Jolie

Harrison, NMFS incidental take team

supervisor, explained.

The new criteria, which attempt to

more realistically model how sound

impacts animals, separately consider

sound levels that might injure animals

and the sound levels which, while possi-

bly not causing injury, would cause some

significant change to animal behavior —

cause an animal to flee from an area, for

example.

For its injury-causing sound criteria,

NMFS has used a variety of data about

marine mammal sensitivity to noise and

extrapolated this data to estimate sound

levels that would cause permanent hear-

ing loss for a variety of mammal species,

Scholik-Schlomer said.

Types of impactThe criteria for injury-causing sound

levels continue to distinguish between

impulsive sound and continuous sound,

but they also consider two distinct poten-

tial impacts to animals: the peak pressure

of the sound waves passing through the

water and the cumulative amount of

sound that an animal might experience

over time. That latter consideration, the

cumulative impact, recognizes the impor-

tance of the duration of sound as well as

the sound level, Scholik-Schlomer

explained.

In assessing the potential for injury,

NMFS also wants to take a much more

focused approach by recognizing the dif-

ferent hearing characteristics of different

animals, even within broad animal classi-

fications such as whales or seals.

Individual whale species, for example,

are being placed into groups based on

whether their hearing responds to low,

medium or high frequency sound, and

with weightings applied to adjust the

sound criteria for a species, based on how

well that species can hear, Scholik-

Schlomer said.

Thus the frequency characteristics of

the sound and the characteristics of a

species’ hearing will both play into esti-

mates of potential marine mammal takes.

Seismic sound, for example, tends to

have quite a low frequency and would

have less impact on whales with mid-fre-

quency hearing than on animals with

lower frequency hearing, Scholik-

Schlomer explained.

NMFS realizes the complexities of

this new approach and is working on

tools and a user guide, to help people

understand the techniques, she said.

Behavioral impactsIn determining acoustic criteria for

animal behavior impacts, as distinct from

impacts that can cause injury, NMFS is

distinguishing between different types of

activity such as seismic surveying,

drilling, impact pile driving and so on,

Scholik-Schlomer said. This approach

recognizes that animal behavior reacts to

the overall nature of an activity, and not

just to the sound that it emits, she said.

The same sound level may have different

impacts, depending on what is being

done.

NMFS is using data from marine

mammal monitoring during industrial

projects to derive behavioral information.

For the initial implementation of the

new guidelines, NMFS is only consider-

ing the behavioral impacts of seismic sur-

veys. If the approach works out, NMFS

will apply the same procedures for other

types of activity, Scholik-Schlomer said.

Fundamentally differentAnd the new approach is fundamental-

ly different from what has been done in

the past.

Rather than, as is done now, taking an

all-or-nothing approach, in which all ani-

mals inside a zone where sound is above

a certain level are assumed to be impact-

ed while no impacts are assumed to occur

to animals outside the zone, NMFS wants

to use a statistical technique to develop an

“exposure response curve,” a curve that

plots the proportion of animals likely to

be impacted by the sound over a range of

see WILDLIFE page 13

As Rep. Anna Fairclough, R-

Anchorage, said on the floor in speaking

for the bill, the 35/5 combination allows

the tax to rise slightly at higher prices,

mitigating the regressivity of the state’s

royalties.

The governor’s bill included a concept

the Senate passed in 2012, a gross rev-

enue exclusion for new oil. The amended

Finance Committee substitute extended

that 20 percent credit to include new oil

from legacy fields — as long as the pro-

ducer can demonstrate to the satisfaction

of the state that a well was not contribut-

ing to production prior to Jan. 1 of this

year. The gross revenue exclusion, or

GRE, also applies to oil from a lease or

property not within a unit at the beginning

of this year, or from a participating area

established after Dec. 31, 2011.

The credit issue ACES provided credits for qualified

capital expenditures and there has been

concern that those credits didn’t necessar-

ily lead to more production and that the

volume of those credits was so large that

if oil prices dropped the state could end

up owing more in credits than it was tak-

ing in from taxes. They are eliminated in

SB 21. Exploration credits and small pro-

ducer credits are allowed to sunset July 1,

2016.

The bill includes a 35 percent net oper-

ating loss which can be monetized or car-

ried forward. And the bill adds a manu-

facturing credit against corporate income

tax for qualified oil and gas service indus-

try expenditures of 10 percent not to

exceed $10 million.

The bill also reduces the interest rate

for delinquent taxes to 3 percentage

points above the annual rate charged

member banks by the 12th Federal

Reserve District, a reduction from what

had been described as a punitive rate of

the higher of 11 percent or the fed rate

plus 5 percent.

Democrats opposedSome opponents favored changes to

ACES and some said more work was

needed.

Sen. Hollis French, D-Anchorage, said

it was “a bad bill” that should be voted

down and called it a giveaway. The oil

industry hasn’t committed to new produc-

tion if the bill passes, he said, and argued

that the bill should be held. He said he’d

be happy to spend the summer just work-

ing on the issue of getting the production

decline curve right.

Sen. Bill Wielechowski, D-Anchorage,

called for killing the bill and starting from

scratch, and said that under the state’s oil

and gas leases producers have an obliga-

tion to produce, an obligation the state

should be enforcing.

He praised the credits under ACES as

encouraging investment and said they

make the state the largest investor.

Wielechowski said under ACES you pay

high taxes if you ship money out of the

state, or get big tax breaks for re-invest-

ing.

Sen. Berta Gardner, D-Anchorage,

see BILL page 17


BILL

distances from the sound source.

“I think it more accurately reflects

what we know about (animal) behavior,”

Scholik-Schlomer said.

NMFS is also categorizing animals

into broad species groups, recognizing

that different types of animal use sound

and respond to sound in different ways,

she said.

A further twist in the new approach is

the consideration of some animal vocal

and respiratory responses that can happen

at relatively low sound levels. NMFS is

also developing sound criteria for species

that appear especially sensitive to sound,

with the bowhead whale being a possible

example of this, Scholik-Schlomer said.

Threshold sound exposure levels will

be specified for the various permutations

of animal types, sound types and types of

harassment, such that any exposures of

the relevant animals to sound levels

above any of the thresholds would consti-

tute takes. Hence, it will be possible to

estimate the total number of animal takes

likely from a specific offshore activity.

Although the new sound thresholds

will be expressed in decibel values, in the

same manner as in the old criteria,

Scholik-Schlomer cautioned about trying

to make comparisons between the sound

level thresholds in the old and new sys-

tems. The criteria cannot be directly com-

pared, especially because the new criteria

use cumulative sound exposures, taking

into account the sound duration, she said.

“We’ve never taken duration into

account like that before,” she said.

ComplicatedSome people at the meeting ques-

tioned the feasibility of using the new

scheme at some point in future for miti-

gating animal disturbance, rather than just

for estimating takes — the new scheme is

significantly more complex than the cur-

rent procedure. And whereas the current

procedure simply involves establishing a

safety circle using a standard set of sound

level thresholds, the new acoustic distur-

bance criteria involve subtleties such as

sound durations and exposure response

curves.

However, Harrison said that she

thought that it would ultimately be possi-

ble to adapt the new methods for mitiga-

tion use.

Some people questioned how tradi-

tional Native knowledge might be incor-

porated into the procedures. Native sub-

sistence hunters worry about the potential

impacts of industrial noise on the wildlife

that they hunt for food. Would impacts on

the subsistence harvest be evaluated as

part of take estimating, one questioner

asked. ●


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Murkowski tries again on park pipelineLegislation would authorize Interior Department to issue right-of-way permit for a natural gas line through Denali National Park


U.S. Sen. Lisa Murkowski, R-Alaska, is again push-

ing legislation to clear the way for construction of

a natural gas pipeline through Denali National Park and

Preserve.

The bill, S. 157, passed the Senate Energy and

Natural Resources Committee on March 14 by unani-

mous consent. Murkowski is the top-ranking Republican

on the Democrat-controlled committee.

The bill is similar to one the full Senate passed on

New Year’s Day, as members worked overtime on the

“fiscal cliff” issue.

That bill, S. 302, went to the House of

Representatives, but ultimately died a couple of days

later when the 112th Congress ended.

S. 157, like the prior bill, would authorize the Interior

Department to issue a right-of-way permit for a high-

pressure gas line. Specifically, the line could be buried in

the utility corridor along a seven-mile stretch of the

George Parks Highway running through Denali Park.

The park segment would be part of a proposed 737-

mile pipeline to deliver North Slope gas to the state’s

population center at Anchorage.

Sen. Mark Begich, D-Alaska, has signed on as a co-

sponsor of S. 157.

Gas for parkThe same bill, titled the Denali National Park

Improvement Act, is pending in the House of

Representatives. The bill number is H.R. 586.

Aside from authorizing the pipeline right of way, the

legislation allows for distribution

lines to supply natural gas for park

operations.

Officials with the National Park

Service, an Interior Department

agency, have voiced support for the

legislation.

Gas pipelines may be permitted

through a national park only if

authorized by an act of Congress.

Murkowski said her bill would smooth the way for a

pipeline segment through the park.

“It’s important for Alaskans that our North Slope nat-

ural gas has a clear legal path to market,” she said in a

March 14 press release. “This bill allows the decisions

on the best route for a pipeline to be based on economic

and commercial grounds, rather than out of concern

about possible lengthy delays caused by trying to win

access rights across federal lands. Routing the pipeline

through the park would not only make it less expensive

to build, but could also take advantage of the existing

utility corridor, preventing disturbances to wildlife and

environmental impacts on undisturbed lands further to

the east or west of the park boundary.”

The ‘bullet’ lineDenali is one of the nation’s most cherished national

parks, featuring North America’s tallest peak, Mount

McKinley, at 20,320 feet.

The park is on the route of the proposed 737-mile

pipeline from North Slope gas fields to the area of

Anchorage and Cook Inlet.

A state agency, the Alaska

Gasline Development Corp., and

legislators are pursuing the line to

address a looming gas shortage in

Southcentral Alaska, where once

robust Cook Inlet gas fields are

depleting.

Known as the “bullet” or

“stand-alone” line, the project is different from a pro-

posed large-diameter export pipeline that would go per-

haps into Canada, or to a liquefaction terminal at Valdez.

The U.S. Army Corps of Engineers already has issued

a final environmental impact statement for the bullet

line.

The EIS considered route alternatives, including one

that would allow a short segment of the pipe to pass

through the huge Denali Park.

A coalition of environmental groups including the

National Parks Conservation Association has said rout-

ing the line through the park “would seem to make the

most sense,” as going around the park would require

construction on undeveloped lands.

Though much smaller than the export line, the bullet

line nevertheless would be a multibillion-dollar

megaproject. And so there’s no guarantee it will ever be

built. ●

Aside from authorizing thepipeline right of way, the

legislation allows for distributionlines to supply natural gas for

park operations.


WILDLIFE


Arctic exploration program. That plan,

going into much more detail than a regu-

lar exploration plan, must describe every

phase of Shell’s operations through to

end-of-season demobilization, including

topics such as a detailed description of all

preparation activities; timelines around

those preparations; the contractors the

company is working with; the schedule

for deployment; the targets and schedule

for in-theatre opera-

tions; and demobiliza-

tion plans, Beaudreau

said.

“We’re asking them

to go another step and

to provide us with a

great deal of detail

around their entire

operation in an integrat-

ed way, including not

only drilling operations

but their maritime oper-

ations as well,” he said.

The review also rec-

ommends that Shell

complete a third-party

management system

audit to confirm, among other things, that

the company’s management systems,

including its oversight of its key contrac-

tors, are appropriate for Arctic operations,

Beaudreau said.

The review report stresses the critical

need for coordination between all entities

involved in some way in Arctic explo-

ration, including the federal government,

state government, local communities and

companies operating in the region. In this

regard, the report notes Shell’s success in

working with Alaska Native communities

that rely on the ocean for subsistence use.

Lack of preparednessBut the review report comments on

what it characterized as Shell’s lack of

preparedness for the 2012 drilling season.

“This review has confirmed that Shell

entered the drilling season not fully pre-

pared in terms of fabricating and testing

certain critical systems and establishing

the scope of its operational plans,” the

report says. “The lack

of adequate preparation

put pressure on Shell’s

overall operations and

timelines at the end of

the drilling season.”

The report com-

ments that Shell gener-

ally performed safely

when conducting activ-

ities within its core

competencies in off-

shore drilling, with two

well top-hole sections

completed, no oil spills,

no significant injuries

and virtually no report-

ed impacts on subsis-

tence activities. But the company experi-

enced some significant problems in other

areas, particularly when depending on

contractors for the delivery of critical

items required for the drilling program or

for the carrying out of certain activities,

the report says.

And the report stresses the need for

Arctic-specific practices for Arctic

drilling, such as the need for a subsea oil


SHELL

Kulluk being picked up from Dutch harborThe heavy-lift vessel Xiang Rui Kou is in Dutch Harbor, preparing to pick up

the Kulluk, Shell’s Arctic floating drilling platform, and carry the Kulluk to Asia

for repair, Shell spokesman Curtis Smith confirmed in a March 19 email to

Petroleum News.

“Over the next few days the Kulluk will be prepped for loading and transport

aboard the Xiang Rui Kou to a shipyard in Singapore,” Smith said. “Once there, a

scope of work will be assigned as well as a timeline associated with that work.”

The drillship Noble Discoverer that Shell is using in the Alaska Arctic is also

being carried to Asia by a heavy-lift vessel for repair.

Smith also confirmed that Shell is in the process of testing its Arctic contain-

ment dome in Puget Sound, near Seattle. Shell has had modifications made to the

dome since a failed test in September. The dome is intended to capture oil from an

out-of-control well, in the unlikely event of a well blowout accompanied by a

blowout preventer failure during an offshore Arctic drilling operation.

“We have been putting the Arctic containment system through its paces for a

number of weeks now,” Smith said. “Final sign-off will have to come from the

Bureau of Safety and Environmental Enforcement at a date to be determined.”

Shell will not require the containment dome until the company resumes its

Arctic drilling — the company has already suspended drilling operations for 2013.

—ALAN BAILEY

Report reviews Shell contractor supervisionThe report issued March 14 from the Department of the Interior’s 60-day review

of Shell’s 2012 Alaska drilling program particularly focuses on what the review

concluded were deficiencies in Shell’s oversight of its contractors.

For example, a major contractor issue arose from the company’s commitment in

late September 2010 to build and deploy a new oil Arctic containment system, for

deployment for the capture of spilled oil in the event of a well blowout accompa-

nied by a blowout preventer failure. The deployment of the containment system

became a key basis for Interior’s approval of Shell’s exploration and oil spill

response plans, the report says.

Contracted refitShell contracted with Superior Energy Services for the design and fabrication of

the containment system, with the choice of contractor being based on the experi-

ence of Superior subsidiaries in the deployment of a similar containment dome sys-

tem in the Gulf of Mexico, the report says. In April 2011 Superior, with Shell’s

agreement, selected the Arctic Challenger, an ice-class barge built in 1976, as a

vehicle for carrying and operating the containment dome, the report says.

But the retrofitting of the Arctic Challenger, a vessel that had lain inactive for

10 years, did not start until late 2011. And, following inspections, structural mod-

ifications and repairs, the vessel was not moved to Bellingham, Wash., for the con-

struction of required on-board facilities until March 2012, just four months prior to

the planned start of the Arctic drilling season, the report says.

Lack of oversightDuring the refit of the Arctic Challenger, Shell did not actively oversee what

Superior was doing or become involved in finding solutions to a series of problems

emerging from the refit process, the report says.

“Indeed, Shell personnel described Superior’s work on the Arctic containment

system during late 2011 and the first half of 2012 as a ‘black box,’” the report says.

The last straw: the grounding of Shell’s floating drilling platform, the Kulluk, on Dec.31 prompted a review by the U.S. Department of the Interior of Shell’s 2012 Arcticdrilling program.

see REPORT page 15

see SHELL page 17

“We’re asking them to goanother step and to provide

us with a great deal ofdetail around their entireoperation in an integrated

way, including not onlydrilling operations but their

maritime operations aswell.” —Tommy Beaudreau,Department of the Interiorprincipal deputy assistant

secretary for land andminerals management

On May 10 the American Bureau of

Shipping, the entity responsible for

assessing the Arctic Challenger for sea-

worthiness, informed Superior of “signif-

icant technical issues” that would likely

prevent the vessel being able to operate

within the required time frame. And later

in May the bureau notified Superior of

“serious concerns” regarding the vessel’s

ability to operate in the Arctic.

In June, with the summer drilling sea-

son rapidly approaching, Shell started

pouring “tremendous manpower

resources” into the Arctic Challenger

project, the report says. But, following

frequent meetings between Shell,

Superior, the American Bureau of

Shipping and government agencies to

resolve “a litany of technical issues,”

mainly safety related, certification of the

vessel was not finally achieved until

October 2012, by which time the drilling

season was effectively over, the report

says.

Containment domeThe development of the containment

system’s containment dome, intended for

operation from the Arctic Challenger, also

suffered delays, with repeated postpone-

ments of the required testing of the dome

for the Bureau of Safety and

Environmental Enforcement, or BSEE,

the report says. Eventually, on Sept. 11,

testing of the dome began in Puget Sound,

near Seattle. BSEE staff noted an absence

of clear lines of authority during the test-

ing, with a series of problems occurring,

including the tangling of lines and a seri-

ous miscalculation of the weight required

to submerge the dome, the report says.

According to the report, Superior told

the review team that during the testing

there had not been a full understanding of

how the dome would be deployed in the

Arctic.

During a test on Sept. 15 the dome

rose to the water surface before sinking

rapidly after a buoyancy tank vented. The

rapid descent of the dome caused the

water pressure to crush the dome’s upper

chambers. Shell and Superior investigat-

ed the cause of the failure and subse-

quently made significant changes to the

dome’s design. But, following the failure

of the dome test, Shell could not drill into

hydrocarbon bearing zones during the

2012 drilling season, the report says.

Two drilling vesselsShell used two drilling vessels in 2012:

the drillship Noble Discoverer and the

floating drilling platform the Kulluk.

Shell owns the Kulluk. Noble Corp. owns

and operates the Noble Discoverer, and

operates the Kulluk for Shell. The Noble

Discoverer, originally built in the 1960s,

was converted into a drillship in the

1970s, the report says.

Shell arranged to have both drilling

vessels refurbished in Seattle. And in June

2012 the U.S. Coast Guard certified the

vessels, after the correction of a number

of deficiencies in each vessel. On June 27

the vessels departed Seattle, bound for

Dutch Harbor, in preparation for the

drilling season.

On July 14 the Noble Discoverer

dragged its anchor at Dutch Harbor, com-

ing within 100 yards of grounding on the

shore. Shell later stated that its own inves-

tigation of the incident had indicated that

the vessel had been using a minimum

amount of anchor chain and that the ves-

sel did not have contingency plans to ade-

quately deal with the weather conditions,

the report says. Shell subsequently took

several actions, including a review of the

Noble Discoverer’s management system,

the report says.

Huge operationShell’s operations in the Arctic in 2012

involved the company’s vessels traveling

about 240,000 nautical miles and the

transfer of 3.25 million gallons of fuel,

the report says. The operations included

562 helicopter flights and 535 fixed-wing

flights, and the coordination of nearly

12,000 passenger trips, flying personnel

to and from the North Slope.

Although the lack of capability of the

helicopters to fly in cloud placed some

constraints on personnel movement, with

potential safety ramifications, the drilling

program proved largely successful and

was virtually free of accident, the report

says.

Because of the terms of Shell’s air per-

mits for its offshore operations, the com-

pany had to limit the number of support

vessels within 25 miles of the drilling

vessels, a restriction that required individ-

ual vessels to conduct multiple missions

and that required the use of a vessel track-

ing and planning system to manage vessel

movements, the report says.

Air emissionsAnd before the start of deployment of

Shell’s vessels to the Arctic it emerged

that the drilling vessel emission levels

that one of Shell’s contractors had provid-

ed for incorporation into Shell’s air per-

mits were unrealistic, with the biggest

problem being emissions from the six

main generators on the Noble Discoverer,

the report said. Apparently, among other

problems, the contractor’s emission con-

trol equipment had not performed correct-

ly during testing, the report says.

Shell switched contractors for the

emissions testing and submitted a revised

permit application for the Noble

Discoverer. The company also requested

a minor change to the air permit for the

Kulluk.

The Noble Discoverer was ultimately

able to conduct drilling operations under

the terms of a compliance order from the

Environmental Protection Agency.

Unfortunately, however, neither of Shell’s

drilling vessels was able to operate below

the emissions limits in their revised per-

mits, a situation that resulted in the EPA

issuing notices of violation, the report

says.

“In addition to reflecting the need for

improved communication with and over-

sight of contractors and manufacturers,

Shell’s air permit challenges underscore

the need to better understand the perform-

ance of different technologies in the

Arctic,” the report says. “Much of Shell’s

emissions control equipment was untest-

ed in the Arctic.”

Ice managementShortly after the start of drilling in the

Chukchi Sea on Sept. 9, Shell successful-

ly implemented its ice management plan,

moving the Noble Discoverer temporarily

off site to avoid a large piece of multiyear

ice observed drifting towards the drilling

location.

In the Beaufort Sea the drilling from

the Kulluk of the mud-line cellar, the cav-

ity in the seafloor that will eventually

hold the well blowout preventer, took

longer than planned. As a consequence

the drillers only had time to set one of the

two casing strings required in the well,

before sealing the well for the end of the

season, the report says.

In general, Shell’s submissions to the

Department of the Interior “consistently

underestimated the length of time

required to complete each step of its

drilling operations,” although the compa-

ny’s internal expectations might have

been more modest, the report says. It

would have been preferable to clearly

communicate to the regulator about

objectives and schedules, taking into

account timing uncertainties resulting

from the variability of Arctic conditions,

the report says.

However, during the drilling season

Shell successfully implemented its com-

munications plan with North Slope com-

munities and the company operated with-

in the terms of a conflict avoidance agree-

ment with the Alaska Eskimo Whaling

Commission. Shell has also been able to

continue a successful environmental

monitoring program in both the Chukchi

and Beaufort seas.

DemobilizationOn Oct. 26 the Noble Discoverer com-

pleted its permitted top-hole drilling oper-

ation in the Chukchi and plugged its well.

By Oct. 28 the vessel was on its way

south to Dutch Harbor, en route to Seattle

for out-of-season repairs. But on Nov. 6

the vessel had to be towed into Dutch

Harbor as a result of severe shaft vibra-

tions in its main engine. On Nov. 16 an

attempt to restart the engine in Dutch

Harbor resulted in a backfire and a small

fire, which the crew immediately extin-

guished. The vessel left Dutch Harbor on

Nov. 21 with a tow assist and was towed

into the port of Seward, Alaska, five days

later, the report says.

A U.S. Coast Guard inspection of the

Noble Discoverer in Seward identified

several deficiencies in the vessel, includ-

ing “substantial problems” with the main

engine, unauthorized modifications and

some safety issues. The Coast Guard has

referred some possible violations of the

International Convention for the

Prevention of Pollution from Ships to the

U.S. Department of Justice for investiga-

tion.

The Noble Discoverer has since been

loaded onto a heavy-lift vessel, and is

being transported to Asia for repairs.

The KullukThe Kulluk, Shell’s other drilling ves-

sel, completed its drilling operations in

the Beaufort Sea on Oct. 30 but, because

of poor weather, was unable to depart the

drilling location until Nov. 8. Shell

planned to tow the vessel to Seattle for

repairs and resupply. On Nov. 22 the

Kulluk arrived in Dutch Harbor and on

Dec. 21 the vessel departed for Seattle,

under tow by the Aiviq, Shell’s new ice-

class anchor handling vessel.

On Dec. 31 the Kulluk ran aground on

the shore of Sitkalidak Island, on the

south side of Kodiak Island, during a

severe storm in the Gulf of Alaska. The

grounding followed a series of incidents

including an engine failure on the Aiviq,

the multiple parting of towlines to the

Kulluk, and support efforts by other ves-

sels and the U.S. Coast Guard. The

Kulluk was subsequently refloated,

inspected and towed back to Dutch

Harbor. Like the Noble Discoverer, the

vessel is to be carried to Asia on a heavy-

lift vessel for repair.

The entire Kulluk grounding incident

is the subject of a formal investigation by

the U.S. Coast Guard. But, according to

“members of the maritime industry expe-

rienced with Arctic towing conditions”

tows across the Gulf of Alaska occur year

round, and there “is nothing inherently

unsound” about conducting a winter tow

in the region, the report says.

“However, given the frequency of

strong storms and dramatic sea states in

this region, operators should incorporate

proper planning, risk assessment and risk

mitigation,” the report says. “Additional

precautions, such as the use of multiple

towlines, should be taken during winter

tow operations.”

Safety managementInterior’s review of Shell’s manage-

ment procedures showed that Shell had in

place an appropriate safety management

system that met the regulatory require-

ments of the Bureau of Safety and

Environmental Enforcement and that pro-

moted a safety culture, the report says.

“However, the existence of program-

matic design elements does not guarantee

a functional and effective risk manage-

ment program, and the review team iden-

tified a number of weaknesses indicating

that Shell’s management systems were

insufficiently robust, particularly in the

area of contractor oversight, to success-

fully manage and minimize overall oper-

ational risks,” the report says. “Shell’s

focus appeared to be on compliance with

prescriptive safety and environmental

regulations required for approvals and

authorizations, rather than on a holistic

approach to managing and monitoring

risks identified during operational plan-

ning.”

Inadequate oversightIn particular, the drilling vessel air per-

mit violations link back to inadequate

oversight of the contractor that provided

data for air permit applications; the delays

in the completion of the Arctic Challenger

refit and the failure of the containment

dome tests arose from a “lack of rigorous

and direct contactor oversight” in a first-

of-its-kind project, and from the use of a

contractor lacking the appropriate certifi-

cation for ship design and build; and the

anchor dragging and other problems with

the Noble Discoverer resulted, in part,

from Shell’s inadequate monitoring of

Noble’s management systems on the ves-

sel, the report says.

The report also questions the effective-

ness of Shell’s internal audit process,

which the report says appears to substan-

tially depend on self-assessments through

a system of checklists.

And the report comments that Shell’s

Alaska exploration operations had not

leveraged the company’s marine expert-

ise, an expertise more associated with

downstream oil transportation and refin-

ing.

—ALAN BAILEY



REPORT

Granite on ‘World’s Most Ethical Companies’ list Granite Construction Inc. said March 6 that it has once again been recognized by the

Ethisphere Institute as one of the 2013 World’s Most Ethical Companies. The 2013 WMEcompanies are those that embrace ethical business practice and demonstrate industry lead-ership.

“Not only did more companies apply for the World's Most Ethical Companies recogni-tion this year than any year in the past, which demonstrates that ethical activity is animportant part of many of these companies' business models, but we are also seeing morecompanies be proactive and create new initiatives that expand ethics programs and cul-tures across entire industries, such as industry-based ethics associations and other activi-ties,” said Alex Brigham, executive director of Ethisphere.

Through in-depth research and a multi-step analysis, Ethisphere reviewed nominationsfrom companies in more than 100 countries and 36 industries. The methodology for theWorld’s Most Ethical Companies includes reviewing codes of ethics, litigation and regulato-ry infraction histories; evaluating the investment in innovation and sustainable businesspractices; looking at activities designed to improve corporate citizenship; and studyingnominations from senior executives, industry peers, suppliers and customers.

“This recognition is a tremendous honor,” said James H. Roberts, president and chiefexecutive officer of Granite Construction Inc. “We are grateful for our 90-year history and

are committed to leading our industry for another 90 years. How we ethically operate ourbusiness and treat others — our customers, suppliers, communities, co-workers and share-holder s— is integral to our continued success.”

Bald Mountain Air Services adds King Air to fleetBald Mountain Air Service said

March 15 that it has added a KingAir 350 to its fleet of fixed wing air-craft. “Our new King Air 350 is thelargest of the King Air line fromHawker Beechcraft,” said JeannePorter, president of Bald MountainAir Service. “We are using this planefor statewide and Lower 48 char-ters.” The new airplane comple-ments the existing fleet ofDeHavilland Single and Twin Otters


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Oil Patch Bits

see BITS page 17

containment system when drilling into

oil-bearing zones and drilling season tim-

ing restrictions that would enable an

open-water response in the event of an oil

spill emergency.

Recommendations adoptedInterior Secretary Ken Salazar said

that Interior accepts the review findings

and will adopt the recommendations.

“These are directives that will be

issued to Shell. This is a Shell-specific

report, and Shell will not be allowed to

move forward into the Arctic to do any

kind of exploration unless they have this

integrated management plan that’s put in

place, that is satisfactory to the

Department of the Interior,” Salazar said.

“Shell screwed up in 2012”

In a March 18 email Shell spokesman

Curtis Smith told Petroleum News that

Shell is committed to safely drill in the

Arctic again and that the company is

applying lessons learned from 2012. In

February the company announced that it

was deferring its planned 2013 drilling

program.

“We appreciate the Department of

Interior’s review of Shell’s 2012 Alaska

operations and take seriously the findings

and recommendations that are highlighted

within,” Smith said. “We also appreciate

the recognition of Shell’s successes in

Alaska and the commitment we have

made to setting a high bar for Arctic

exploration. Consistent with our recent

decision to pause our 2013 drilling pro-

gram, we will use this time to apply les-

sons learned from this review, the ongo-

ing Coast Guard investigation and our

own assessment of opportunities to fur-

ther improve Shell’s exploration program

offshore Alaska.”

Varied reactionsAlaska’s congressional delegation

expressed their support for Shell’s Alaska

program.

“There’s a history of safe drilling in

Alaska’s Arctic waters going back to the

1970s,” said Sen. Lisa Murkowski.

“While Shell’s exploratory drilling pro-

gram maintained that record of safety,

they did experience problems with trans-

portation and in other areas that need to

be addressed before Shell proceeds.

However, I want to review the full report

to ensure that stricter oversight is not

code for prohibiting access to our

resources.”

Environmental organizations have

latched onto Shell’s problems as illustrat-

ing the difficulties and risks of Arctic off-

shore oil exploration.

“We would have liked to see the

Department of the Interior commit to con-

tinued evaluation of Shell’s 2012 opera-

tional problems to ascertain if — as we

believe and the evidence supports — it is

unwise to proceed with Arctic Ocean

drilling at this time,” said Lois Epstein,

Arctic program director for The

Wilderness Society. “A 60-day analysis is

not enough time to truly assess and devel-

op remedies for Shell’s very serious fail-

ures.” ●


SHELL


BMAS uses for bear viewing excursions and to support the oil and gas industry with pas-senger and cargo service. BMAS also has a King Air 200 that is contracted to providemedevac service for the Alaska Regional Hospital Life Flight program. With its extendedrange and 300-knot speed, the King Air 350 can go non-stop to Dutch Harbor or Seattlewith nine passengers. “It’s the safest Twin Turbo prop airplane ever built,” said Porter.Bald Mountain Air Service is headquartered in Homer, with bases in Deadhorse andAnchorage. BMAS has been serving government agencies and the oil and gas andtourism industries with accident-free flight services since 1993. For information on char-tering the new King Air 350, contact [email protected]. For more infor-mation on BMAS, visit www.baldmountainair.com.

Editor’s note: All of these news items — some in expanded form — will appear in thenext Arctic Oil & Gas Directory, a full color magazine that serves as a marketing tool forPetroleum News’ contracted advertisers. The next edition will be released in September.


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called the bill a colossal failure, said the

state is highly profitable for industry under

ACES and agreed with Wielechowski that

under their leases the producers have an

obligation to produce.

Sen. Lyman Hoffman, D-Bethel, said

the stakes were too high for changing the

tax system without some assurances of

more production so that benefits could be

ensured to Alaska residents.

Sen. Johnny Ellis, D-Anchorage, argued

during debate over an amendment adding

back in progressivity for North Slope lega-

cy fields said it was an issue of fairness.

The legacy fields are Alaska’s legacy, he

said, and shouldn’t be treated like ATM

machines for the producers. Alaskans want

their share, he said, and want their cut when

prices go higher.

More time neededSen. Gary Stevens, R-Kodiak, said the

bill has a long way to go — and comparing

it to cooking, said it’s not yet soup. He

recited conflicts the state has had with the

industry including the Amerada Hess case,

the Exxon Valdez oil spill and the VECO

bribery scandal. Senators, he said, have

decided to put enormous trust in an indus-

try which has often been untrustworthy.

The bill gives away too much to major

oil companies producing from legacy

fields, Stevens said.

He had advanced an amendment adding

a sunset clause to the bill, which failed 9-

11, and said the bill would have been easi-

er to support had the sunset clause been

added.

Calling the bill a historic gamble with

the people’s money, he said the bill was

“not yet soup.”

Sen. Bert Stedman, R-Sitka, who has

worked extensively on the oil tax issue,

said there are some good policy calls in the

bill dealing with credits and excessive pro-

gressivity, but said he was concerned that

progressivity was completely removed.

For new production, the bill is fairly

close, he said, but the state’s take might be

low, calling it at the bottom of the recom-

mended range.

It’s been a three-year process and it’s

come a long way, with “just baby steps to

go,” Stedman said, expressing concern that

the state’s share at legacy fields was too

low and that it wasn’t necessary to reduce

rates when that production was already

economic.

Stedman said his main concern was the

legacy fields, saying that was where the oil

is, where the money is and where the mar-

gins area. He said the bill left too much

money on the table and it wouldn’t be easy

to go back and pick that up.

Clock is tickingThose voting for the bill were upbeat

about the outcome.

Fairclough said the clock is ticking and

the need for a change is recognized. The

goal, she said, is to increase production and

make Alaska competitive. The fiscal notes

which project a tax loss from replacing

ACES don’t take into account any new pro-

duction, she said, and present a worst-case

scenario, Fairclough said.

In a press availability after the floor ses-

sion Fairclough said the vote for the bill

was a “courageous move” for Alaska’s

future, for the future rather than taking ben-

efits today.

Sen. Lesil McGuire, R-Anchorage, cited

testimony legislators had heard that ACES

is broken and said now is the time to act.

She rejected remarks that the bill had been

put together quickly and noted that many of

the components in the bill were voted on by

the Senate a year ago. The expansion of

GRE to legacy fields, she said, is aimed at

getting new oil in the line in the next three

to five years, since it takes so much longer

to get new fields into production.

Sen. Cathy Giessel, R-Anchorage, said

in the press availability that the bill is inno-

vative in meeting the state’s needs. The

change in credits, she said, gets around the

problem that under ACES about 50 percent

of the credits were going to companies

without production.

Competitiveness necessarySen. Peter Micciche, R-Kenai, said after

the floor session that there had been argu-

ments that no business would operate this

way. He called it a competitiveness issue

and said to survive every business has to

compete and said the committees spent

hours determining competitiveness, learn-

ing from global experts how to be compet-

itive.

He also noted that the most damaging

aspects of ACES, increased progressivity,

passed on the floor without investigation.

The state has paid for that for years,

Micciche said, as oil prices drove a “reset”

in the American petroleum industry, and

Alaska wasn’t invited.

On the floor earlier in the day he said the

real giveaway was the result of capital

credits under ACES with no connection to

progressivity. SB 21 had been slightly

regressive, he said, and the change to the 35

percent base tax and the $5 per barrel

allowance, referred to as 35/5, made the bill

“slightly progressive.”

Sen. Pete Kelly, R-Fairbanks, said on

the floor that he was concerned with how

legislators were “spending our children’s

future.”

He said he doesn’t “accept decline as

inevitable,” which would mean accepting

failure and called keeping ACES, “clinging

to decline” and riding that decline rate

down the route to failure.

SB 21, he said, is aimed at the future and

trying to extend production so our kids will

have something left. ●

EXPLORATION & PRODUCTIONUS drilling rig count jumps 24 to 1,776

Oilfield services company Baker Hughes Inc. says the number of rigs actively

drilling for oil and natural gas in the U.S. increased by 24 the week ending March

15 to 1,776.

The Houston-based company said in its weekly report that 1,341 rigs were

actively drilling for oil and 431 for gas. Four were listed as miscellaneous. A year

ago, Baker Hughes counted 1,984 working rigs.

Of the major oil- and gas-producing states, Louisiana gained eight rigs,

Oklahoma seven, Texas three, New Mexico and Pennsylvania two each, and

North Dakota and Wyoming one apiece. West Virginia was down one. Alaska,

Arkansas, California and Colorado were unchanged.

The rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999.

—ASSOCIATED PRESS


BILL

US crude supplies down by 1.3M bblThe United States’ crude oil supplies fell the week ending March 15, the govern-

ment said March 20.

Crude supplies declined by 1.3 million barrels, or 0.3 percent, to 382.7 million

barrels, which is 10.5 percent above year-ago levels, the Energy Department’s

Energy Information Administration said in its weekly report.

Analysts expected an increase of 2 million barrels for the week ended March 15,

according to Platts, the energy information arm of McGraw-Hill Cos.

Gasoline supplies declined by 1.5 million barrels, or 0.7 percent, to 222.8 million

barrels. That’s 1.8 percent below year-ago levels. Analysts expected gasoline sup-

plies to shrink by 2.5 million barrels.

Demand for gasoline over the four weeks ended March 15 was 1.5 percent high-

er than a year earlier, averaging 8.5 million barrels a day.

—ASSOCIATED PRESS

wells and two sidetracks at its Qugruk

prospect between the Oooguruk and

Colville River units, ConocoPhillips had

spud one well in its Bear Tooth unit in

the National Petroleum Reserve-Alaska,

Linc Energy LLC had spud one well at

the Umiat prospect farther south in the

NPR-A and Pioneer Natural Resources

had drilled the Nuna No. 2 well at the

Nuna development of its Oooguruk unit

and is currently conducting hydraulic

fracturing operations on the well.

Those companies plan to drill as

many as three additional penetrations

among them.

But Brooks Range Petroleum Corp.

and UltraStar Exploration LLC have

deferred exploration work for this sea-

son, and Linc is also pushing off some

work until 2014.

Repsol most activeRepsol is currently drilling at three

pads across its Qugruk prospect.

At Qugruk No. 1, Repsol has drilled

a vertical section to 7,050 feet measured

depth, and is currently drilling a hori-

zontal lateral. At Qugruk No. 6, Repsol

has drilled a vertical section to 7,809

feet measured depth and is currently

drilling the horizontal section.

The company plans to complete,

stimulate and flow test both wells.

At Qugruk No. 3, Repsol is currently

coring at a measured depth of 6,925

feet. The company plans to continue to

its target depth and drill a sidetrack, as

with the other wells.

Conoco drills CassinIn the NPR-A, ConocoPhillips spud

the Cassin No. 1 well earlier in March.

The well is in the Bear Tooth unit, the

second of two federal units

ConocoPhillips operates in the NPR-A.

The well is in the middle of the unit, on

lease AA081754, which is part of Unit

Area A, a subset of the unit designated

for initial work commitments.

The 2009 Bear Tooth unit agreement

required ConocoPhillips to drill a well

in Unit Area A and to test a previous

well it drilled in the unit — Scout No. 1

— by June 1, 2012, and the U.S. Bureau

of Land Management subsequently

extended the deadline by one year.

Last year, ConocoPhillips staked nine

potential well locations in the NPR-A,

two in its Mooses Tooth unit and seven

in the Bear Tooth unit (five wells and

two sidetracks), and eventually permit-

ted two locations: Cassin No. 1 and the

as-yet-undrilled Cassin No. 6.

ConocoPhillips has received both a

BLM and AOGCC permit for Cassin

No. 6.

Cassin No. 1 is ConocoPhillips’ first

well in the NPR-A since 2009.

Linc spuds, defersIn early March, Linc spud Umiat No.

18, the first well at the Umiat oil field

since 1979, but a string of weather

delays forced the company to defer

some work until next year.

The Australian independent original-

ly planned a four-to-six well program at

Umiat for this winter, but after light

snowfall early in the season combined

with extreme cold snaps, the company is

now planning to drill just two wells this

winter and cold-stack its rig on location

to get a head start on mobilization for

the 2013-14 winter exploration season.

Linc is currently drilling Umiat No.

18 vertically into the Lower Grandstand

formation to collect core samples and

plans to continue below the Lower

Grandstand “to assess the deeper

resource potential,” according to the

company. After reaching its target depth,

Linc plans to plug the well back to the

Lower Grandstand to conduct a flow

test.

Later in the season, Linc plans to drill

the Umiat No. 23H well directionally

into the same Lower Grandstand inter-

val to provide “comparative flow test-

ing” for economic purposes.

Among the wells being deferred until

2014 is the Umiat DSP No. 1 Class II

disposal well.

UltraStar seeking extensionUltraStar Exploration LLC is defer-

ring its North Dewline No. 1 well.

The Alaska-based independent origi-

nally hoped to drill the well last year,

but delayed the project because of rig

availability. Earlier this season,

UltraStar Managing Member Jim Weeks

told Petroleum News he was still chas-

ing leads for investors to fund the proj-

ect.

UltraStar drilled Dewline No. 1 at the

unit in 2009. Under the existing five-

year plan of exploration for the Dewline

unit, UltraStar must drill a second well

by May 31, 2013.

In November, UltraStar asked for an

extension to that deadline, but the

Division of Oil and Gas denied the

request, Weeks told Petroleum News

March 15. UltraStar appealed the deci-

sion to the Department of Natural

Resources and is awaiting a response, he

said.

Brooks Range developingBrooks Range Petroleum Corp. is

well under way on its infrastructure

work at its Mustang development

prospect, but will defer exploration at

two other prospects until 2014.

The operating arm of the Alaska

Venture Capital Group recently com-

pleted an ice road from the Kuparuk

River unit 2M pad to the Mustang devel-

opment and is currently mining and

moving gravel for the purpose of build-

ing an all-season road and a drilling pad.

The company expects to complete the

infrastructure this year, complete facili-

ties installation early next year and

bring the Mustang field into production

by late in the third quarter of 2014,

BRPC Chief Operating Officer Bart

Armfield told Petroleum News.

At the Tofkat unit, along a bend in the

Colville River near Nuiqsut, Brooks

Range Petroleum “continues to work

with area stakeholders to obtain the

required permitting for drilling” and

expects to drill a well and potentially a

sidetrack next winter, Armfield said.

At the Kachemach unit, the company

“continues to re-process and merge

acquired seismic data to identify opti-

mal drilling location and target” and

plans to drill an exploration well next

winter, after discussing the project with

working interest owners.

—ERIC LIDJI



EXPLORATION

land and environment.

Faced with delays that have added a year to the regu-

latory phase of Enbridge’s Northern Gateway project,

the government has announced

measures to reduce the risks of

an offshore oil spill, while nam-

ing a special representative to

seek “social license” from First

Nations to proceed with a host

of projects.

Eyford to begin meetingsNatural Resources Minister

Joe Oliver announced March 19

that Vancouver attorney Doug

Eyford will immediately start

meetings with aboriginals in communities affected by

plans to build crude bitumen and natural gas pipelines,

LNG plants, marine terminals and related infrastructure.

He said the appointment is a “seminal moment” in

relations between the government and First Nations as

Ottawa seeks an answer to First Nations’ concerns about

the impact on an estimated C$650 million in resource

projects over the next decade, with C$100 billion expect-

ed to occur in British Columbia.

Eyford will also work with the

governments of British Columbia

and Alberta who are feuding over

the Northern Gateway pipeline

planned to export 525,000 barrels

of crude bitumen to Asia and

import 193,000 bpd of conden-

sate.

He is scheduled to deliver a

preliminary report to Harper by

June 28 and a final report by Nov.

29.

Eyford said he was unsure whether his reports would

be made public, but insisted his mandate was not to act

as an advocate for any project.

His said his role was to “provide

an accurate and complete report” to

Harper.

Reinforcing spill defensesOn March 18, Oliver and

Transport Minister Denis Lebel

said C$120 million will be spent

over the next five years on eight

measures to reinforce Canada’s oil

spill defenses by developing a

“world class” regime of tanker inspection and surveil-

lance.

The changes will be introduced before final decisions

are made on applications by Enbridge and Kinder

Morgan to ship a combined 1.15 million bpd out of ports

at Vancouver and Kitimat.

Oliver said the government’s overriding commitment

is to “make polluters pay for any costs related to coastal

oil spills.”

Of the three priority items, all foreign-registered ves-


WALL

The marine safety initiative is aimedat satisfying the British Columbia

government of Premier Christy Clarkwhich insisted on improved tanker

safety as one of five key demands thatmust be met before the province would

allow the construction of pipelinesfrom the oil sands to the Pacific Coast.

see WALL page 19

STEPHEN HARPER

In early March, Linc spud UmiatNo. 18, the first well at the

Umiat oil field since 1979, but astring of weather delays forced

the company to defer some workuntil next year.

ation, making it the world’s fourth largest exporter, with

several more in the works.

“There is no catching Australia, which is in full con-

struction mode,” said Gary Wellinger, vice president of

strategic development with Spectra Energy

Transmission.

The United States, which has import gasification and

pipelines in place, is also widely viewed as more com-

petitive than Canada, while Russia, East Africa (notably

Mozambique) and the Middle East (notably Qatar) are in

the hunt.

Sales contracts a challengeThe overriding challenge for proponents seems to be

reflected by George Kirkland, executive vice president,

upstream, for Chevron, now operator of the Kitimat

LNG project in partnership with Apache.

He told an analyst meeting that Chevron would like to

have up to 70 percent in long-term sales contracts locked

up before making a final investment decision, pointing to

Chevron’s Gorgon (targeted for startup in 2015) and

Wheatstone projects in Australia as very good models.

Chevron Chairman and Chief Executive Officer John

Watson said his company will strive for oil-linked pric-

ing and will not make final decisions unless projects

“have economics that support the costs that are going to

be incurred.”

At best, Canada is two years

from its first LNG shipments,

with none of the major players

having inked long-term contracts

with Asian buyers.

“If we think world LNG mar-

kets are just waiting patiently for

Western Canadian LNG projects,

then we’re mistaken,” said

Wellinger.

“We really have to raise our

game to participate in the LNG

business,” said Gerry Goobie, principal with Gas

Progressing Management. “If we’re going to be success-

ful we’ve got to get our product to market cheaper than

the next guy.”

But he warned that the regulatory “dithering” that

killed the Mackenzie Gas Project could do the same to

LNG if Canada takes forever to issue approvals.

Progress moving forwardThe most public showing of ambition followed com-

pletion of the C$6 billion takeover of Progress Energy by

Malaysia’s Petronas, giving a sharp

jolt to the Pacific Northwest LNG

project.

“We are moving forward with LNG

offtake customers,” said Michael

Culbert, who remains chief executive

officer of Progress now that it is a

Petronas subsidiary.

“We think that by the end of this

year, we will have those all satisfied.

In addition, Petronas will take a certain

portion of the LNG ... to serve their

customer base as well.

“With them underwriting probably as much as 50 per-

cent of the LNG project, we feel well positioned com-

pared to some of our competitors,” he said.

In addition, Progress plans to triple its rig count in the

British Columbia Montney play this year, as it targets

initial shipments by 2018, assuming a final investment

decision by the end of 2014 to spend C$9 billion-C$11

billion on two plants of 6 million

metric tons each.

Culbert said most of the 150

wells Progress plans to drill this

year are designed to “prove up

reserves, prove up the contingent

resource and then, ultimately,

we’ll go back in and develop that

resource for production.”

To that end, Progress has dou-

bled its rig count in the past three

months to 16 and plans to be at 25

by year-end, while increasing its production to 80,000

barrels of oil equivalent per day from 50,000 boe per

day.

Each horizontal Montney well, completed with eight

or nine hydraulic fractures, costs about C8 million,

Culbert said.

Japex takes stakeJapan Petroleum Exploration has injected added hope

into the Pacific Northwest project by taking a 10 percent

stake in the venture.

The Japanese company also expects to qualify for an

equity share of LNG from the project

totaling 1.2 million metric tons per

year.

“Japex believes that importing nat-

ural gas as LNG from Canada, which

has ample reserves, will help diversify

Japan’s LNG imports,” the company

said in a statement.

Japex managing director Mitsuru

Saito said his company is weighing a

mix of price-setting benchmarks to

achieve stable but less costly LNG

prices, but declined to set a price tar-

get.

The newly formed partnership of AltaGas-Idemitsu,

aiming to start exports by 2017, has prompted the

Japanese partner to acquire stakes in Canadian gas plays

to ensure price-competitive LNG imports.

Idemitsu President-elect Takashi Tsukioka said earli-

er in March that “if there are good stakes in gas fields,

we would like to find them in Canada, hoping to bring

LNG that is as cheap as possible to Japan.”

Final Shell investment decisionTwo other Canadian LNG developments far removed

from the British Columbia coast have also taken place.

Royal Dutch Shell announced it has taken a final

investment decision on two small-scale liquefaction

projects to supply LNG as a fuel for heavy trucks and

large ships in the United States and Canada.

It said the units will be built in Ontario and Louisiana,

with each capable of producing about 250,000 metric

tons per year of LNG.


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COMMERCIAL DIVINGOFFSHORE SUPPORTMARINE CONSTRUCTIONENVIRONMENTAL SERVICESPROJECT MANAGEMENTLOGISTICAL SUPPORT

MORE THAN JUST A DIVING COMPANY

sels will now receive the same treatment as Canadian

ships, with mandatory annual inspections; a National

Aerial Surveillance Program established in 1991 will

qualify for additional federal funding to monitor ship-

ping activities in the Pacific waters and watch for illegal

oil discharges; and the government will establish a

Tanker Safety Expert Panel to develop recommendations

for enhanced safety standards.

Demand for improved safetyThe marine safety initiative is aimed at satisfying the

British Columbia government of Premier Christy Clark

which insisted on improved tanker safety as one of five

key demands that must be met before the province would

allow the construction of pipelines from the oil sands to

the Pacific Coast.

British Columbia Environment Minister Terry Lake

said March 19 that until his government completes a

review to determine what gaps exist in overall marine

spill response it will not comment on the federal meas-

ures.

Darcy Dobell, vice president of the World Wildlife

Fund’s Canada Pacific region, said tightening regula-

tions will not change her organization’s fundamental

opposition to Northern Gateway.

The Northern Gateway project entered the final

stretch March 18 of public hearings that have lasted 15

months with Janet Holder, Enbridge’s Northern Gateway

leader, conceding the company may be unable to satisfy

all of the competing interests in the project.

“I think it is important to understand this is a very

diverse project,” she told a joint review panel of

Canada’s National Energy Board and the Canadian

Environmental Assessment Agency. “It’s a very complex

project. There are a lot of interests at stake.”

John Carruthers, president of Northern Gateway

Pipelines, said about 60 percent of aboriginal communi-

ties affected by a pipeline and tanker terminal have

signed agreements to take equity stakes in the pipeline

and efforts to engage the others will continue.

Carrie Henchitt, an attorney for the Heiltsuk Nation,

said aboriginals are more than just stakeholders. “We

have specific rights very different from other interest

groups,” she said.

—GARY PARK


WALLThe Northern Gateway project entered the finalstretch March 18 of public hearings that havelasted 15 months with Janet Holder, Enbridge’s

Northern Gateway leader, conceding thecompany may be unable to satisfy all of the

competing interests in the project.


LNG

see LNG page 20

In addition, Progress plans to tripleits rig count in the British ColumbiaMontney play this year, as it targetsinitial shipments by 2018, assuming

a final investment decision by theend of 2014 to spend C$9 billion-C$11 billion on two plants of 6

million metric tons each.

Royal Dutch Shellannounced it has taken a

final investment decision ontwo small-scale liquefactionprojects to supply LNG as a

fuel for heavy trucks andlarge ships in the United

States and Canada.

Shell said the units will give a lift to

demand for struggling gas production by

forming the basis of new LNG transport

corridors in the Great Lakes and Gulf

Coast region, taking advantage of low-

cost shale gas.

“Natural gas is an abundant and clean-

er-burning energy source in North

America and Shell is leveraging its LNG

expertise and integrated strength to make

LNG a viable fuel option for the com-

mercial market,” said Marvin Odum, the

president of Shell Oil Co., the U.S. divi-

sion of Royal Dutch Shell.

The Canadian plant will supply LNG

fuel to all five Great Lakes that border

US states and Canadian provinces and

the St. Lawrence Seaway.

Shell said it plans to increase LNG-

for-transport projects to more than 5 mil-

lion metric tons a year over the next

decade, with about half being supplied to

the trucking industry in Canada and the

U.S. and the rest to shipping in the U.S.

and Northwest Europe.

Shell said it expects Ohio-based

Interlake Steamship Co., which runs 10

vessels, to be its first marine customer.

The St. Lawrence Seaway has never

seen an LNG-fueled ship, but a

spokesman for the seaway management

said LNG is no more of a risk than any

conventional fuels.

Pieridae moving ahead Meanwhile, Pieridae Energy Canada

has registered its Goldboro LNG project

with the Nova Scotia government as it

prepares to file for an environmental

assessment, while partners Contact

Exploration and Pieridae Energy are cre-

ating a new natural gas-focused explo-

ration and production entity to develop

gas for the project.

Pieridae Production Limited

Partnership, PPLP, will source, develop

and produce gas to supply a significant

portion of feedstock for the Goldboro ter-

minal, which is expected to export about

10 million metric tons per year and have

onsite storage of 690,000 cubic meters.

Pieridae President Alfred Sorensen

said he expects to be fully contracted by

the end of June, with the major emphasis

on Europe and “significant interest” from

India.

The initial assets acquired by PPLP

include about 50,000 acres of prospective

gas lands in New Brunswick, initially

held by Contact, which has received an

initial cash payment of C$1.3 million

from Pieridae.

An independent study in 2010 by GLJ

Petroleum Consultants gave a best esti-

mate of prospective resources on the

PPLP lands of 2.138 trillion cubic feet

based on a 20 percent recovery factor of

the undiscovered petroleum-initially-in-

place of 10.897 tcf gross. The study con-

cluded that recovery factors should range

between 10 percent and 30 percent for

such resources. ●



LNG

Pieridae Energy Canada hasregistered its Goldboro LNGproject with the Nova Scotia

government as it prepares to filefor an environmental assessment,

while partners ContactExploration and Pieridae Energyare creating a new natural gas-

focused exploration andproduction entity to develop gas

for the project.

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