l Flint Hills closing - Petroleum News · the fishing, oil, mining and shipping ... State and feds liaise over Arctic strategies Legislative consultants, parties, start ... This is

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Q&A: Giessel sees LNG futurefor Alaska; committee working bill

Vol. 19, No. 6 www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of February 9, 2014 $2.50

Noble Discoverer, the drillship Shell plans to use for Chukchi Seadrilling. The company has said it wont drill in 2014 following a 9thCircuit Court decision on a 2008 federal Chukchi Sea lease sale. Seestory page 8.

Noble DiscovererC

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RTES

Y S

HEL

L Flint Hills closingRefiner closing North Pole plant due to high costs, contamination dispute

By ERIC LIDJIFor Petroleum News

Flint Hills Resources Alaska LLC will gradual-ly stop processing crude oil at its North Polerefinery over the coming months, the companyannounced on Feb. 3.

The company said it made the decision becausean outstanding liability dispute on top of difficultmarket conditions made the long-time refiningoperation impossible. The dispute concerned agroundwater contamination incident discoveredseveral years ago.

The refiner plans to stop producing gasoline onMay 1 and stop producing jet fuel and other

refined products from its sole remaining crudeprocessing unit no later than June 1.

Flint Hills will continue to market jet fuelthrough its terminals at the Anchorage andFairbanks airports and will maintain a staff of 35 tooperate its 30 million gallon storage facility inNorth Pole for local distribution, but said it wouldsupply both operations from third parties. The

The refinery has made no secret in recentyears about its unease over the local

market conditions for its services.

see REFINERY CLOSING page 15

$2.3B for Conoco in 2013Company reports flat income in state despite falling Alaska production, prices

By ERIC LIDJIFor Petroleum News

ConocoPhillips earned nearly $2.3 billion inAlaska in 2013.The company saw its Alaska earnings stay rela-

tively flat year over year despite productiondeclines, in part because of a lower production taxrate under ACES as oil prices dropped. Even so,ConocoPhillips paid nearly $4 billion in taxes androyalties on its Alaska operations.

For the fourth quarter, ConocoPhillips earned$555 million in Alaska, up from the seasonallylower third quarter, but down from the same peri-od during the previous year on declining produc-tion. The company paid nearly $1 billion in obliga-

tions during the quarter, which vice presidentfinance, ConocoPhillips Alaska Vice President ofFinance Bob Heinrich attributed to the outgoingAlaskas Clear and Equitable Share fiscal system.

The fourth quarter of 2013 is similar to whatwe have seen historically under ACES where we

The Alaska crude oil price includes somenatural gas liquids, which is part of thereason why it is higher than the averageLower 48 price of $93.79 per barrel andthe average Canada price of $79.73 per

barrel for 2013.

see CONOCO NUMBERS page 18

Focus on the ArcticState commission releases its draft policy in parallel with federal plan

By ALAN BAILEYPetroleum News

On Feb. 3 the Alaska ArcticPolicy Commission pre-sented its draft report to thestate Legislature, setting outproposals for the states visionfor the future of its Arctic terri-tory and making recommenda-tions for how to achieve thatvision. Issue of the report synchronized with the pub-lication by the Obama administration of an imple-mentation plan for the U.S. national Arctic strategythat the administration published in May 2013.

Concerned that the state should take a leadershiprole in a continuing national and international Arcticdialogue, as the Arctic evolves under the impact of the

changing climate, during the2012 legislative session theAlaska Legislature establishedthe Alaska Arctic PolicyCommission to formulate astate policy and implementa-tion strategy. The commission,chaired by Sen.Lesil McGuireand Rep. BobHerron, consists

of 10 members of the Legislature and 16 people froma variety of backgrounds, including the state adminis-tration, the federal government, rural communities;the fishing, oil, mining and shipping industries; aca-demia and conservation groups.

see ARCTIC FOCUS page 14

SEN. LESIL MCGUIRE REP. BOB HERRON

NWT after Asian partners, takingproactive approach to investors

April 1 will be no joke in the Northwest Territories. Just atime for jovial celebration.

Thats the day 41,000 residents of an area sprawling over520,000 square miles will achieve theirlong-sought goal of replacing theCanadian government and gaining man-agement control of a treasure trove of oiland natural gas riches, along with miner-als and diamonds.

And the NWT is eagerly displayingsome fancy footwork as it seeks to findtango partners in China, India, Japan andSouth Korea.

As Industry, Tourism and InvestmentMinister David Ramsay likes to tell audiences, the NWT holds35 percent of Canadas known natural gas resources and 30percent of its oil.

Having finally secured a devolution agreement with the

Legislative consultants, parties,start MOU, HOA discussion

The Alaska Senate Resources Committee is workingthrough the heads of agreement, HOA, and memorandum ofunderstanding, MOU, for an Alaska LNG project. While thestate was a participant in negotiations for the documents,which if authorized by the Legislature would put the state ona path for equity participation in an LNG project taking natu-ral gas off the North Slope for sale into Asian markets, thedocuments are not binding without passage of enabling legis-lation which the committee was scheduled to begin consider-ing Feb. 7, after this issue went to press.

The committee heard from the Legislatures consultantsFeb. 3 and from North Slope producers, TransCanada and theAlaska Gasline Development Corp. Feb. 5. Representativeswho worked on the HOA discussed the document with thecommittee. The MOU is between TransCanada and the state,so of the Feb. 5 panel members, only Tony Palmer wasinvolved in those negotiations.

Whats different?David Van Tuyl, regional manager for BP Exploration

(Alaska), said the HOA tells LNG markets that the key play-ers are united behind a single project.

Bill McMahon, ExxonMobil senior commercial advisor,

see NWT CHANGES page 19

see LNG MOVES page 13

DAVID RAMSAY

http://www.petroleumnews.com

2 PETROLEUM NEWS WEEK OF FEBRUARY 9, 2014

Petroleum News North Americas source for oil and gas newscontents

10 Showdown set in Furie Jones Act case

12 Murkowski presses multiple oil issues

13 Badami pipeline lease transfer approved

4 Canada holds drilling line

7 Month-over-month ANS production down 1.2 percent

6 Interior funds wetlands projects7 NOAA extends comment for noise studyEXPLORATION & PRODUCTION

11 A look at the longer term for PWS response12 Experts to convene at oil spill symposium

ENVIRONMENT & SAFETY

ALTERNATIVE ENERGY

5 BP says owners worked issue of more MI

AOGCCs 1995 CO 360 decision asked Prudhoe owners to report on plans to increase miscible injectant; agency got explanation

9 Chugach reports on wind power usage

Fire Island wind farm has produced about 50,000megawatts of electricity; Chugach Electric used more than 90 percent of output

4 Suncor reins in shale gas portfolio

CEO has said company will review and refine portfolio to ensure growth, returns; natural gasdevelopment said to be about timing

8 Continuing uncertainty for Shells plans

Court debacle over Chukchi Sea lease sale raises further questions over when the company can resume its Arctic drilling program

3 Giessel sees opportunity in LNG project

Anchorage senator serves on Arctic Policy Commission,would like to see Alaskan chair Arctic Council when US heads it in 2016

6 BSEE working on Arctic response regs

Oil spill response contingency requirements will be specified as part of a package of new Arctic outer continental shelf regulations

10 Miller Energy closes North Fork purchase

Subsidiary Cook Inlet Energy will operate the KenaiPeninsula natural gas field; acquisition value put at nearly $65 million

11 Governor seeks OK for royalty oil sales

Bills submitted to Alaska Legislature would authorizetwo-year contract to supply up to 15,000 barrels of crude daily to Tesoro

GOVERNMENT

FINANCE & ECONOMY

PIPELINES & DOWNSTREAM

SIDEBAR, Page 18: The decision for industry on the pipeline

SIDEBAR, Page 14: State and feds liaise over Arctic strategies

Legislative consultants, parties,start MOU, HOA discussion

NWT after Asian partners, takingproactive approach to investors

Flint Hills closing

Refiner closing North Pole plant due to high costs, contamination dispute

$2.3B for Conoco in 2013

Company reports flat income in state despite falling Alaska production, prices

Focus on the Arctic

State commission releases its draft policy in parallel with federal plan

ON THE COVER

AlaskasOil and GasConsultants

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By STEVE QUINNFor Petroleum News

Sen. Cathy Giessel gets first crack atGov. Sean Parnells gas line bill. Aschair of the Senate ResourcesCommittee, Giessel will have held thefirst hearing on Senate Bill 138 on Feb.7.

Prior to that, the AnchorageRepublican held overviews on two non-binding agreements between the state,North Slope leaseholders ExxonMobil,BP and ConocoPhillips, pipeline compa-ny Trans Canada and the Alaska GaslineDevelopment Corp. The first was amemorandum of understanding, MOU,and the second a Heads of Agreement,HOA.

Giessels handling of SB 138 was alsotimed with the release of a preliminaryreport released by the states ArcticPolicy Commission.

Giessel sat down with PetroleumNews to discuss her views on the reportand SB 138.

Petroleum News: Lets start with theArctic Policy Commissions preliminaryreport. The report seems to be an aggre-gate of recommendations. What do youwant federal regulators to do with thisreport?

Giessel: This is preliminary. The com-mission is in place until January 2015,so we have another year to work on it.We recognize that it is not complete. Myteam took up a second portion of thisreport, and that was oil spill preventionand response, and we didnt do that untilOctober. So you can see it was a veryshort timeframe to put anything together.That section will get a lot more attentionthis coming year. We will refine recom-mendations. The goal of this report is toadvise and guide the federal governmentas they write Arctic policy.

Right now weve seen about six dif-ferent reports come out in the last yearfrom the federal government. They areextremely broad and high level. In somecases, they are a little misinformed. We

recognized that ifwe dont speak up,that will be theArctic policy.

We need to helpthem hone in andhelp them clarify,making it somethingthat is really appli-cable and reflectiveof Alaska. A lot ofthose folks writing those reports havenever been here. The U.S. takes up thechairmanship of the Arctic Council in2016. We would like to see an Alaskanthe person who is holding the gavel inthat role. Just as Canada, which has thechairmanship now, has a Canadian FirstNations person (Leona Aglukkaq, anInuk from Nunavut) holding their gavel,we believe an Alaskan should hold theU.S. gavel.

The federal government doesnt seemrecognize that we have a process in placethat has been working and actually Iunderstand that federal regulators cameand sat in on one of our DNR-DEC-Fishand Game meetings. They have weeklymeetings where they collaborate and talkabout permits, problems with the permitsand what they want to improve. So fed-eral regulators sat in and were veryimpressed.

This is basically a case of speakingup or not being heard, right?

Petroleum News: You noted the oilspill prevention and response, with Shelltrying to get back on a schedule forexploration, is there a connectionbetween future exploration and this seg-ment?

Giessel: The oil spill prevention andresponse chapter wasnt intended toaddress specifically a particular compa-nys project. Its more globally how arewe as a state prepared to respond to anincident. We have Alaska Clean Seas,but that is still kind of limited. We haveour oil spill prevention and responsefund in the Department ofEnvironmental Conservation that is

responding to the various smaller spills,but we really havent addressed how wewould manage something larger.

One of the things that we are aware ofis that when industry is present offshore,they bring with them the infrastructure,the vessels, and the trained personnel torespond to these different kinds of inci-dents. It actually brings a positive to thecommunities around that area in a biggerway. By this I mean when Shells vesselsare present and there are vessels navigat-ing through the BeringStraits, referring to thoseas innocent vessels, if theyhave an incident, having acompany like Shell pres-ent with response vesselsactually protects us because we haveno Coast Guard up there. Its a positivething. Its a comment that (former stateRep. and current Northwest BoroughMayor) Reggie Joule made at PNWRlast August that they actually bring asafety net with them. Its a very insight-ful comment. We can rely on industry.We have to have a Coast Guard pres-ence. Thats another key talking pointyoull see in the commissions report,urging the U.S. to ramp up our CoastGuard and our icebreaker response capa-bilities.

Petroleum News: All right, gettingback to having someone from Alaskatake the lead when the U.S. chairs theArctic Council, who would you havefrom the state in that role? One of theco-chairs?

Giessel: Im not going to namenames. I think weve got a lot ofAlaskans who have been working onArctic issues and are very knowledge-able about Arctic issues and have a glob-al perspective as well. Ill leave thoseunnamed, because I dont want to leavesomeone out inadvertently. I think wehave at least five people right off the topthat I could name who could fill that slotin a very credible way.

Petroleum News: What else do you

believe you folks achieved either throughthis report or your meetings last year?

Giessel: I think that it was a greatopportunity for lawmakers there are10 of us on the commission to get tosit in listening sessions with rural folksin those rural communities. Thats notsomething we get to do a lot. A surpris-ing time was in Barrow when severalfolks former Mayor Edward Ittabeing one of them came forward, andIm paraphrasing, of course, and said, we

are good with resourcedevelopment in that area.We hope we are able tostick a straw in ANWR andpull out oil. We are a littleuncomfortable about off-

shore. We think more work needs to bedone as far as protection of the environ-ment, but lets open up ANWR. That wasa surprise to me, but one I was happy tohave heard. It wasnt just Mayor Itta. Itwas others.

Petroleum News: OK, still on offshoredrilling. What are your thoughts on the9th Circuit Courts decision critical ofthe governments lease sale, which ledShell to postpone this years drilling sea-son?

Giessel: I was disappointed. Shell hasdone remarkable work on the Arctic.They have been collecting a tremendousamount of data that the Coast Guard andfederal government did not have aboutthe environment, on the ocean floor andthe area. Temperatures, ice thickness, allof this information the federal govern-ment didnt even have. I think they arevery prepared to go forward withdrilling, so its disappointing to me whenthe third branch of the federal govern-ment (judicial) steps in and makes deci-sions about our resource development.Im thankful that Shell seems to be will-ing to persevere. Five billion dollarsspent so far in more than five years. Imthankful they are willing to continue. Ofcourse they have a global portfolio andthey have spent a tremendous amount of

PETROLEUM NEWS WEEK OF FEBRUARY 9, 2014 3


Giessel sees opportunity in LNG projectAnchorage senator serves on Arctic Policy Commission, would like to see Alaskan chair Arctic Council when US heads it in 2016

SEN. CATHY GIESSEL

see GIESSEL Q&A page 17

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EXPLORATION & PRODUCTIONCanada holds drilling line

Canadas petroleum services sector is counting on a marginal dip in oil and naturalgas drilling this year, targeting 10,930 well completions up 160 from its initial fore-cast three months ago, but off 167 from the final tally in 2013.

The Petroleum Services Association of Canada, PSAC, based its forecast on aver-age commodity prices of C$3.50 per million British thermal units for gas at the AECOtrading hub and US$95 per barrel for West Texas Intermediate crude both figuresunchanged from November.

As usual, Alberta is expected to lead the provincial pack with 6,642 wells, followedby Saskatchewan at 3,229, British Columbia 560 and Manitoba 480, with 16 wellsscheduled for Eastern Canada and three for the Northwest Territories.

PSAC President Mark Salkeld said in a news release there is a continuing trendtowards multiwell pads and greater use of horizontal drilling. Technological advancesare making such drilling more logistical and economical for producers, he said.

PSAC predicts that 85 percent of this years wells will target oil prospects and 15percent will focus on gas.

Scott Treadwell, an analyst with TD Securities, said in a research note that 2014 isan extension of activities started last year, but 2015 should see a drilling ramp up asoperators start building up supplies to support LNG export projects that are expectedto come on stream in 2018-19.

PSAC represents 250 companies involved in Canadas upstream industry. Industry statistics show that 610 rigs, or 76 percent of a fleet of 801, were active in

late January.GARY PARK


Suncor reins in shalegas portfolioCEO has said company will review and refine portfolio to ensuregrowth, returns; natural gas development said to be about timing

By GARY PARKFor Petroleum News

O il sands giant Suncor Energy is con-tinuing on its relentless march tocapital discipline and aligning its assetswith strategic objectives by shelving plansto develop shale gas properties in BritishColumbia.

The move means Suncor has effectivelycounted out supplying feedstock for LNGexports as a cash generator for the assets.

Early stage delineation work in themassive Montney formation, which strad-dles the British Columbia and Alberta bor-der, has been dropped from the companysagenda after it tested the potential for part-nerships, causing further head scratchingamong other major E&P companies whichare grappling with the impact of risingcosts on their profit margins.

The Montney in British Columbia hasan estimated 271 trillion cubic feet of gasresources and has been touted as the lead-ing supply source for any LNG exports.

More timing than qualityA Suncor spokeswoman said the com-

panys decision is more about the timing ofdevelopment than the quality of theresource.

Further development of the play will bepostponed, pending a change in marketsupply and demand fundamentals, shesaid.

Suncor first signaled its concern aboutgas prospects nine months ago when itstruck a C$1 billion deal with the UnitedKingdoms Centrica and state-ownedQatar Petroleum International to unload abundle of assets producing 42,000 barrelsof oil equivalent per day, including 978 bil-lion cubic feet equivalent of conventional

gas operations in northeastern BritishColumbia.

The bulk of Suncors gas productionhas been used to generate steam for itsthermal recovery oil sands operations, butthose volumes have been drastically scaledback to a daily average of 290 millioncubic feet from 574 million cubic feet in2010.

Portfolio reviewChief Executive Officer Steve Williams

has quietly made the point in recent timesthat Suncors goal is to continuouslyreview and refine its portfolio to ensurethey are delivering profitable growth andstrong returns for shareholders.

He said last year that Suncor was wellpositioned to be an LNG player, but hecautioned that no detailed plans had beendeveloped and that his company would notbe stampeded into joining the rush.

Williams said Suncor has 176,228 acresof Montney lands which might hold 8 tril-lion cubic feet of resources.

The company has made no secret thatits future is staked heavily on producingand marketing less-processed oil sandsbitumen, underscored by its partnershipdecision with Totals Canadian unit andTeck Resources to move ahead with theC$13.5 billion, 180,000 barrels per dayFort Hills project, scheduling first produc-tion in 2017.

Suncor said it would stage constructionof Fort Hills and assemble some compo-nents offshore to curb capital spending.

It plans to spend C$7.8 billion this year,with about C$4.2 billion earmarked forgrowth projects, including C$1.9 billion toadvance oil sands projects. l

http://www.doyonanvil.comhttp://www.alaskatextiles.com

By KRISTEN NELSONPetroleum News

I n 1995 the Alaska Oil and GasConservation decided, in ConservationOrder 360, that maximum ultimate recov-ery from Prudhoe Bay would be achievedby maximizing production of natural gasliquids, NGLs, for sale down the trans-Alaska oil pipeline, rather than by maxi-mizing miscible injectant production forenhanced oil recovery.

The operators at the time assured thecommission that there was adequate MI,but as part of that order the commissionrequired a report on plans to increase thevolume of miscible injectant, MI, avail-able for enhanced oil recovery, EOR.

Following a 2012 hearing on potentialwaste of propane at Prudhoe, the commis-sion found propane was not being wasted,but came away from the propane hearingquestioning whether sufficient MI wasbeing produced and whether it needed torevisit CO 360.

That conservation order settled a dis-pute between the major Prudhoe Bayworking owners then ARCO, BP andExxon over whether natural gas liquidsfrom the field should preferentially besold down the trans-Alaska oil pipeline asNGLs or used to create MI for enhancedoil recovery, EOR. At that time the ownersheld different percentages of the PrudhoeBay gas cap and oil rim. The field wasalso split geographically, with half operat-ed by ARCO and half by BP. BP held alarger portion of the oil rim, which meantit benefitted if more MI was created forEOR, while ARCO and Exxon held moreof the gas rim, which meant they benefit-ted if more NGLs were sold with the oil.

Alignment of oil rim and gas cap own-ership occurred as a result of the purchaseby Phillips Petroleum of ARCOs Alaskaassets in 2000. Also as a result of that sale,BP also took over operatorship of theentire field.

The commission held a Jan. 7 hearingon the issue of revisiting CO 360 (see sto-ries in Jan. 12 and Jan. 26 issues).

One question the commission askedwas whether the working interest ownershad ever provided the report required bythe order on plans to increase the volumeof MI available for EOR.

The commission said it was unable tofind a copy of that report.

Was the report filed, the commission

asked? If so, could the companies pleaseprovide a copy?

Report to commission In a Jan. 29 follow-up to the commis-

sion on questions remaining from the Jan.7 hearing, attorney Jeffrey Leppo of StoelRives, responding for Prudhoe operatorBP, provided copies of correspondence onthe MI issue and a record of a meeting.

A Dec. 19, 1996, meeting was held,including AOGCC, the Department ofNatural Resources and the Prudhoe Bayworking interest owners.

Leppo said the meeting agenda andrelated letters showed that the agencyreview held Dec. 19, 1996, was under-stood by all the parties to functionally sat-isfy the Dec. 15, 1996, deadline in CO360. He said that from BPs perspective,the correspondence and meeting agendacopied to the commission, substantiatethat the terms report and plan in para-graph 1.B of the AOGCCs order wereintended by the AOGCC and understoodby the operators to require an explanationto the AOGCC, but not a formal filing ordocument. The letters also document anongoing dialogue between the PBU oper-ators and the AOGCC regarding planningfor increased manufacture of MI throughthe MIX-IPF project.

ARCO took the leadARCO took the lead in a conceptual

study called miscible injectant rateenhancement or MIRE, initiated in the fallof 1995 and conducted by a team from themajor owners, Leppo said. The study,completed in the late winter or spring of1996, examined methods for increasingMI to at least 600 million cubic feet perday, and recommended further engineer-ing design and study focus on MI expan-sion through increased pressure and flow,the MIX-IPF project option, whichfocused on adding a new booster com-pressor module at the Central Gas Facility,CGF, and also involved upgrades to MIcompressors, refrigeration compressorsand CGF gas injection compressors.

Anticipated benefits of the MIX-IPFwere an increase of 500 million cubic feetper day in the overall field gas rate, a 100million cubic feet per day increase in MI,a 2,000 barrels per day increase in NGLsand a 20,000 bpd increase in oil produc-tion.

Initially there was an increase in gasrate, oil and NGL production and manu-facture of MI. But there were significantproblems after startup with low tempera-ture separator gas/gas exchanges, whichwere replaced in 2003.

Rates again temporarily increased, butnew problems resulted in the gas/gasexchangers, again reducing incrementalMI and NGL benefits of the MIX-IPFproject. The units were replaced in late2005.

By the time the 2005 replacementswere made, the MIX-IPF project could notachieve the 600 million cubic feet per dayof MI because of the leaning out of theCGF feed gas, accelerated by the use ofMI for EOR operations at Point McIntyreand at other satellite pools, Leppo said.

Project undertakenWhile the MIX-IPF project was under-

taken with the goal of increasing MI tosome 600 million cubic feet per day, asspecified in CO 360, problems withimplementation reduced the benefits ofthe project for several years, Leppo toldthe commission.

When the projects were fullyaddressed, the baseline level of MI pro-duction had dropped from more than 500million cubic feet per day in 1996-97 toless than 300 million cubic feet, due tothe leaning of the CGF feed gas, acceler-ated by important beneficial changes inthe use of MI for EOR. Because the CGFfeed gas had become leaner, benefits ofthe MIX-IPF project were not sufficient toraise the MI level to 600 million cubic feetper day.

Other projects consideredBP has considered two other major

projects since 1995 to increase MI forEOR without reducing extraction of max-imum blendable NGLs, Leppo told thecommission.

It studied the miscible injectant expan-sion by environmental reduction orMIXER concept in 2002, which looked ata new cryogenic gas plant using surplusgas lift compression to generate more MIwhile reducing carbon dioxide emissions.After study, the concept was not pursuedbecause of both poor yields and poor eco-nomics, Leppo said.

More recently, BP evaluated adding afourth low temperature separator to theCGF, but that proposal, Leppo said,proved prohibitively expensive. l

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

BP says owners worked issue of more MIAOGCCs 1995 CO 360 decision asked Prudhoe owners to report on plans to increase miscible injectant; agency got explanation


WWW.NAC.AERO (800) 727-2141

W ERE OFF TO RURAL ALASKA

SLED DOGS & SOFAS & MILK

A Dec. 19, 1996, meeting washeld, including AOGCC, the

Department of Natural Resourcesand the Prudhoe Bay working

interest owners.

http://www.nac.aero


The Bureau of Safety andEnvironmental Enforcement, orBSEE, is working with the Bureau of OceanEnergy Management on new oil spill pre-vention and response regulations tailored tothe Arctic outer continental shelf, ChristyBohl from BSEEs oil spill response divi-sion told a meeting of the Alaska RegionalResponse Team on Jan. 29. The oil spillrelated regulations come as part of a pack-age of regulation revisions designed toaddress specific Arctic offshore safety andenvironmental protection concerns.

We propose to publish those (new regu-lations) in the Federal Register by the end ofthis first quarter of calendar year 2014,Bohl said.

The agencies are about to ask the federalOffice of Management and Budget for itsfinal review of the proposed regulations, shesaid.

The Alaska Regional Response Team, orARRT, is the advisory board to the U.S.Coast Guard oil spill response on-scenecommander and maintains an oil spill con-tingency plan for coordinating the responseefforts of federal agencies and other organi-zations in Alaska.

Addressing concernsThe Arctic revisions to BSEEs oil-spill-

related regulations address concerns raisedby various stakeholders and deal with anumber of issues that are unique to Alaska,Bohl said. The regulations take into accountthe response tactics, personnel and equip-ment inventories needed to support a worst-case oil discharge lasting 30 days of more ina remote location, including the logistical

support systems needed in a frontier area.You have to bring everything with you,

so were looking to see that (contingency)plan holders are planning to supply theentire response, Bohl said.

The regulations consider issues such ashaving available adequate communicationssystems, the timely application of non-mechanical response techniques, as well ashaving adequate on-water facilities to storerecovered materials and a management planfor dealing with recovered waste.

Although the ARRT maintains a spillresponse plan, federal law requires an entitysuch as an oil company that handles liquidhydrocarbons to have its own spill preven-tion and response plan, suitably equippedand resourced to launch a credible spillresponse. Federal regulations spell out theminimum spill prevention and responserequirements that such a contingency planmust meet.

Arctic researchBohl also overviewed some research that

BSEE is progressing to address issues relat-ing to oil spill response in the Arctic off-shore.

In February the agency will use itsOhmsett test facility to evaluate the effec-tiveness of some types of dispersant onAlaska crude oils in cold water, she said.The manufacturer of the dispersant used inthe response to the Deepwater Horizon dis-aster has placed new terms over the sale anduse of its product, thus causing oil spillresponse organizations to consider the useof other dispersant materials, Bohl said.

In addition, an investigation of the effec-tiveness of dispersants for use in theBeaufort and Chukchi seas will provideinformation to support dispersant-use deci-sion making.

The Ohmsett facility, located in NewJersey, consists primarily of a large watertank that can be used to simulate ocean con-ditions for the testing of offshore oil spillresponse techniques.

Surrogate iceAs one of its research projects, BSEE is

investigating the development of materialthat can be used to simulate ice during thetesting of skimmers, boom and other equip-ment for oil spill response in sea-ice condi-tions. A report into another research projectinvestigating the use of autonomous under-water vehicles for mapping spilled oil underice is due out in July testing of this sur-veillance technique will take place atPrudhoe Bay in April, Bohl said.

Some testing of the use of standard hoses


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GOVERNMENTInterior funds wetlands projects

The U.S Department of the Interior has announced $16.5 million in grants Jan.23 to help fund 21 projects for coastal wetlands conservation in 12 states andPuerto Rico, including Alaska. State and local governments; private landowners;conservation groups; and other partners will contribute an additional $18.2 mil-lion to the projects, Interior said.

The federal funding assistance comesunder the National Coastal WetlandsConservation Grants Program. The projectsinclude acquiring and restoring or enhancingcoastal wetlands and adjacent uplands to pro-vide long-term conservation benefits to fishand wildlife and their habitats, Interior said.

Coastal wetlands not only provide keyhabitat for fish and wildlife but they alsoimprove water quality, support localeconomies through jobs and provide floodprotection, said Interior Secretary Sally Jewell when announcing the grants.These grants, funded through excise taxes paid by anglers and boaters, give usthe opportunity to join with states and territories and other partners to conserveand restore these areas that are so vital to our environment and our quality of life.

With the latest data showing dramatic annual loss of coastal wetlands, thesegrants become even more important, said Arthur Ashe, director of the U.S. Fishand Wildlife Service. These wetlands are invaluable resources we must protect,and, with these grants, states, territories and partners will be able to undertakehigh priority projects.

In Alaska $1 million of grant funding is being provided to a $5.1 million proj-ect being conducted by the Alaska Department of Natural Resources and the GreatLand Trust to protect about 2,585 acres of wetlands near shore habitat on north-eastern Afognak Island within the Kodiak Archipelago, between the Kodiak IslandNational Wildlife Refuge and the Afognak Island State Park.

ALAN BAILEY

The projects includeacquiring and restoring orenhancing coastal wetlands

and adjacent uplands toprovide long-term

conservation benefits to fishand wildlife and theirhabitats, Interior said.


BSEE working on Arctic responseregulationsOil spill response contingency requirements will be specified aspart of a package of new Arctic outer continental shelf regulations

As one of its research projects,BSEE is investigating the

development of material that canbe used to simulate ice during the

testing of skimmers, boom andother equipment for oil spill

response in sea-ice conditions.

see ARCTIC REGS page 7

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and hose couplings in Arctic condi-tions should be completed by October.BSEE is also investigating the avail-ability of temporary storage devicesavailable for Arctic use, to ensure thatthese devices have sufficient storagecapacity to handle a worst-case oil dis-charge, Bohl said.

Coastal imageryBSEE is also funding the develop-

ment of a coastal imagery tool that willprovide an inventory of the Arcticcoastline from Cape Lisburne to theCanadian border. This tool, whichcould be used for spill response plan-ning or during an actual spill response,should be available shortly, Bohl said.

BSEE is also funding a review ofany oil spill gaps, the periods of theyear during which an Arctic spillresponse would not be practical, shesaid. l

continued from page 6

ARCTIC REGS

GOVERNMENTNOAA extends comment for noise study

Following a request from Sen. Lisa Murkowski, the National Oceanic andAtmospheric Administration has extended the deadline for public comments on theresults of a new study into the impacts of acoustic noise on marine mammals, accord-ing to a Jan. 23 release from Murkowskis office. When, between Christmas and NewYear, NOAA opened a one-monthpublic comment period on theresults of its study, Murkowskiprotested at the timing, character-izing the announcement as anunwelcome holiday surprise.

NOAA has now extended thedeadline for comments to March13.

The study results propose newcriteria for assessing the impact ofnoise on marine mammals NOAA wants to rejig the way in which acoustic impacts are assessed when permittingthe accidental disturbance of animals during noise-generating activities such as seis-mic surveys and offshore drilling. The idea is to model the impact of sound on marinemammals more realistically than is done at present using simple sound-level criteria.The ultimate objective is to avoid the injury of animals by industrial noise.

The sound criteria used for permitting are critical in determining the mitigationmeasures that companies must take to comply with authorizations for accidentalwildlife disturbance.

I want to thank NOAA for reconsidering the amount of time they were providingthe public to comment on this critical issue, Murkowski said. When you think aboutAlaska, this guidance will impact our coastal communities, the maritime sector, thetransit of goods, the fishing industry, oil and gas basically anyone who is out on thewater. If you are going to have good process and get meaningful feedback on such acomplex issue, you have to allow for time to weigh in.

ALAN BAILEY


Month-over-monthANS production down 1.2 percentANS crude oil averages 560,964 bpd in January, down from 567,600in December; Cook Inlet edges up 1% to 16,888 bpd in December

By KRISTEN NELSONPetroleum News

January crude oil production fromAlaskas North Slope averaged560,964 barrels per day in January, down1.17 percent from a December average of567,600 bpd, a drop of 6,636 bpd.

All North Slope fields, exceptEndicott, saw month-over-month declinesranging from a drop of 2.87 percent atLisburne to 0.35 percent at Prudhoe Bay.

January information is from theAlaska Department of Revenues TaxDivision which reports North Slope oilproduction consolidated by major produc-tion centers and provides daily productionand monthly averages. More detaileddata, including Cook Inlet and individualNorth Slope fields and pools, is reportedby the Alaska Oil and Gas ConservationCommission on a month-delay basis.

The BP Exploration (Alaska)-operatedPrudhoe Bay field, the North Slopeslargest, averaged 327,593 bpd in January,down 0.35 percent from a December aver-age of 328,739 bpd, a drop of 1,146 bpd.Prudhoe Bay production includes satelliteproduction at Aurora, Borealis, MidnightSun, Orion and Polaris, as well as produc-tion from the BP-operated Milne Pointand Northstar fields.

Nikaitchuq up in DecemberThe ConocoPhillips Alaska-operated

Kuparuk River field, the Slopes secondlargest, averaged 138,100 bpd in January,down 2.62 percent from a December aver-age of 141,812 bpd, a drop of 3,712 bpd.Kuparuk production includes satellitefields at Meltwater, Tabasco, Tarn and

West Sak, as well as production from theEni-operated Nikaitchuq field and thePioneer Natural Resources-operatedOooguruk field.

AOGCC data for December showsNikaitchuq production averaged 18,744bpd, up 15.57 percent (2,526 bpd) from aNovember average of 16,218 bpd, whileOooguruk averaged 6,965 bpd inDecember, down 1.14 percent (80 bpd)from a November average of 7,045 bpd.

The ConocoPhillips-operated Alpinefield averaged 56,079 bpd in January,down 2.35 percent (1,347 bpd) from aDecember average of 57,426 bpd. Alpineaccounted for 66 percent of the fieldsproduction in December; there is alsoproduction from three satellites Fiord,Nanuq and Qannik.

The BP-operated Lisburne field, partof greater Prudhoe Bay, averaged 28,127bpd in January, down 2.87 percent (830bpd) from December production of28,957 bpd. Lisburne production includesPoint McIntyre and Niakuk.

The BP-operated Endicott field aver-aged 11,065 bpd in January, up 3.74 per-cent (399 bpd) from a December averageof 10,555 bpd. Endicott productionincludes the Savant-operated Badamifield. AOGCC data for December showsBadami production at 1,222 bpd, down1.43 percent (18 bpd) from Novemberproduction of 1,240 bpd.

Cook Inlet edges up 1%Cook Inlet production averaged

16,888 bpd in December, up 1.12 percentfrom a November average of 16,701 bpd.

Cook Inlets largest field, Hilcorp

see ANS PRODUCTION page 9

The study results propose new criteriafor assessing the impact of noise on

marine mammals NOAA wants torejig the way in which acoustic impacts

are assessed when permitting theaccidental disturbance of animals

during noise-generating activities suchas seismic surveys and offshore drilling.

http://www.amarinecorp.comhttp://www.deltaleasing.net


With the U.S. Court of Appeals for the9th Circuit upholding a long-stand-ing appeal against the Department of theInteriors 2008 Chukchi Sea lease sale,Shells hopes of drilling in the Alaska Arcticoffshore have yet again been thwarted bylegal action. But what does this mean for thecompanys Arctic exploration efforts?

On Jan. 22 the 9th Circuit Court, inresponse to an appeal against the validity ofthe environmental impact statement, or EIS,for the lease sale ruled that the EIS wasflawed. The court remanded the appeal caseback to the federal District Court in Alaska.Now, the lack of a legally valid EIS rendersthe lease sale itself invalid, thus raising ques-tion marks over the legal status of the leasesthat Shell and other companies purchased inthe sale.

Shell, which had hoped to continueexploration drilling in its Chukchi leasesduring the coming summer, has announceda postponement of its drilling plans becauseof the uncertainties resulting from the appealdecision.

The District Court has yet to make astatement concerning the next steps in thecase. However, a further significant modifi-cation to the EIS would appear to be an obvi-ous requirement, with the time required tomake the necessary changes unclear.

Varied responsesEnvironmental organizations, all of

which oppose Arctic offshore oil explo-ration, responded positively to the 9th

Circuit decision.The oil industry is clearly not ready to

operate safely in the Arctic Ocean, andlacks the technology to recover significantamounts of spilled oil from cold, remoteand stormy seas, said Nicole Whittington-Evans, Alaska regional director for the

Wilderness Society. The decision to can-cel drilling plans in 2014, and possiblybeyond, represents a major victory for notonly bowhead whales and polar bears, butfor the Alaska Native communities thathave existed in the Arctic for thousands ofyears, and that depend on the Arctic Oceanas a source of food and cultural traditions.

Alaska politicians, including the statescongressional delegation and Gov. Parnell,expressed a different perspective.

Todays news is extremely disappoint-ing for Alaska, but certainly understand-able given the recent Ninth Circuit Courtruling, Parnell said. Multiple years offederal regulatory delay, litigation delay,and one year of operational issues havecreated barriers to Alaskans near-termeconomic prospects. Still, offshore energydevelopment will play an enormous role inAlaskas economic future, and I remaincommitted to responsibly developing ourvast offshore resource basin. As we moveforward, I am confident Shell can be partof Alaskas bright future.

Permits neededPrior to the 9th Circuit decision Shell

had not, in fact, announced any final deci-sion to drill in the Chukchi in 2014. Thecompany had said that it hoped to drill in2014 or 2015 but that its ability to drillwas contingent on obtaining the necessarypermits for the vessels and equipment inits drilling fleet. And, given some substan-tive changes to that fleet, Shell had faceda formidable challenge in acquiring all ofthe permits that it needed prior to sendingits fleet into the Chukchi in time to makeuse of the 2014 summer open water sea-son.

Shell has filed a revised Chukchi Seaexploration plan with the Bureau of OceanEnergy Management, or BOEM, forapproval. BOEM has not yet deemed theexploration plan complete and ready forpublic review Shell and BOEM havebeen exchanging communications regard-ing the completion of the plan to the fed-eral agencys satisfaction.

Just to complicate the permitting situa-tion, Shell has been facing something of amoving permitting target, in that BOEMand the Bureau of Safety andEnvironmental Enforcement are preparing


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Continuing uncertainty for Shells plansCourt debacle over Chukchi Sea lease sale raises further questions over when the company can resume its Arctic drilling program

CO

URT

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ELL

Shell is using the drillship Noble Discover for drilling in the Chukchi Sea. The vessel has undergone some significant upgrades and repairssince Shells 2012 Chukchi Sea drilling endeavor.

see SHELLS PLANS page 11

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A fter more than a year of obtainingsome its power supplies from CookInlet Region Inc.s Fire Island wind farm,offshore Anchorage, Southcentral utilityChugach Electric Association has now pur-chased about 50,000 megawatt hours ofelectricity from the wind farm, the utilitytold the Regulatory Commission of Alaskain a Jan. 30 status report.

The wind farm started outputting powerat the end of August 2012, although formalcommercial operation did not commenceuntil Dec. 31 of that year. According to datapresented to the commission by ChugachElectric, the power output from the farmwas highest in January 2013 when the util-ity purchased 6,880 megawatts of electrici-ty. The minimum monthly power purchaseof 2,213 megawatt hours took place in July2013. On average the wind farm generatedabout 30 percent of its theoretical maxi-mum power output, the status report says.

Some curtailmentHowever, Chugach Electric was unable

to use all of the power that it purchasedfrom Fire Island, with the utility decliningthe use of a total of 4,799 megawatt hoursof the purchased power over the course of2013. This curtailment of power from thewind farm mainly occurred as a conse-quence of an outage on the power trans-mission line that connects hydroelectricpower on the Kenai Peninsula to

Anchorage, the status report says. The con-sequent lack of access to hydropower, cou-pled with constraints on the gas-firedpower generation facilities elsewhere onthe power grid, limited Chugach Electricsability to accommodate the fluctuating FireIsland power output, thus causing the utili-ty to have to decline some of that wind-generated power, the status report says.

Nevertheless, the resulting curtailmentof less than 10 percent of Fire Islands totaloutput was well below the figure of 25 per-cent curtailment that had been assumed forthe first year of the wind farms operation,the status report said.

The wind power that Chugach Electricused enabled the utility to register a total of44,725 renewable energy credits theutility is marketing these credits, with anyproceeds from credit sales being used toreduce the cost of renewable electricity forthe utilitys customers.

Accommodating fluctuationsPrior to the startup of the wind farm in

2012 one major bone of contention innegotiations between CIRI and AlaskaRailbelt utilities over purchase agreementsfor Fire Island power was the potential costto the utilities of accommodating powerthat fluctuates with the wind strength.Power utilities need some spare generatingcapacity that can compensate dips in thewind power output. And that spare capaci-ty costs money.

Railbelt utilities also expressed concernthat the fluctuating wind power might

cause power instability in the Railbeltpower grid, although CIRI said that, withthe output from Fire Island being small incomparison to total generation capacity onthe grid, the impact of the power fluctuationfrom the wind farm would be negligible.

In its status report, Chugach Electricsaid that there is as yet no definitive verdicton this issue and that a further six to 12months of data gathering, analysis and dis-cussion will be required to determine thetotal impact of wind power usage on thegrid. The status report says that, as part of

this analysis, Chugach Electric has askedAnchorage utility Municipal Light &Power to provide information about anycosts and impacts incurred by the utility asa result of the connection of Fire Island tothe grid. Apparently, Municipal Light &Power has reported a preliminary reviewindicating an increase in the variability ofthe alternating current frequency on thegrid since the wind farm went into opera-tion. l

l A L T E R N A T I V E E N E R G Y

Chugach reports on wind power usageFire Island wind farm has produced about 50,000 megawatts of electricity; Chugach Electric used more than 90 percent of output


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SAFETY

Alaska-operated McArthur River, aver-aged 4,523 bpd in December, up 4.19percent from a November average of4,341 bpd.

Hilcorp-operated Trading Bay aver-aged 2,662 bpd in December, up 5.96percent from a November average of75,361 bpd. Granite Point, also operat-ed by Hilcorp, averaged 2,407 bpd inDecember, up 2.87 percent from aNovember average of 2,340 bpd.

Hilcorp-operated Swanson Riveraveraged 2,269 bpd in December, up3.03 percent from a November averageof 2,203 bpd.

Middle Ground Shoal, operated byExxonMobil subsidiary XTO, averaged

2,096 bpd in December, down 6.7 per-cent from a November average of 2,246bpd.

Redoubt Shoal, operated by CookInlet Energy, averaged 1,593 bpd inDecember, down 20.71 percent from aNovember average of 2,009 bpd. WestMcArthur River, also operated by CookInlet Energy, averaged 1,190 bpd inDecember, up 31.83 percent from aNovember average of 903 bpd.

Hilcorp-operated Beaver Creekaveraged 148 bpd in December,unchanged from November.

ANS crude oil production peaked in1988 at 2.1 million bpd; Cook Inletcrude oil production peaked in 1970 atmore than 227,000 bpd. l


ANS PRODUCTION

http://www.asrcenergy.com

By WESLEY LOYFor Petroleum News

M iller Energy Resources Inc. says ithas closed its purchase of the NorthFork natural gas field on Alaskas KenaiPeninsula.

Tennessee-based, publicly traded Milleroperates in Alaska through its Anchorage-based subsidiary, Cook Inlet Energy LLC.

Miller acquired North Fork from a part-nership led by Denver-based ArmstrongOil and Gas Inc.

The North Fork field is on the southern

Kenai Peninsula, east of the community ofAnchor Point.

Miller had announced in late Novemberit intended to buy North Fork in a nearly$65 million transaction. The company saidat the time that the deal would involve justunder $60 million in cash plus $5 millionin Miller preferred stock.

Contract with EnstarIn a Feb. 5 press release, Miller said the

North Fork unit was producing about 7million cubic feet of gas per day.

The gas is being sold under contract to

Enstar Natural Gas Co. at a fixed price of$7 per thousand cubic feet, Miller said.Enstar is the main gas utility inAnchorage.

Miller in November said about 4.8 bil-lion cubic feet remained on a 10 bcf com-mitment to Enstar.

Cook Inlet Energy will operate NorthFork, and is seeking state approval fortransfer of the unit leases.

The company launched as an Alaska oiland gas producer in late 2009, and begancommercial gas sales in 2013.

North Fork is the first producing prop-erty for Cook Inlet Energy on the inletseast side. The company operates the WestMcArthur River oil field and the Ospreyoffshore platform on the west side.

New financing arrangementMiller said it used new financing to

help pay for the North Fork acquisition.Specifically, the company said it had

entered into a $175 million second liencredit facility with Apollo InvestmentCorporation and Highbridge PrincipalStrategies.

Miller said $75.3 million was used torefinance its previous credit facility and$56.6 million was used on the North Forkacquisition, with the remainder availablefor general corporate purposes andexpenses.

Miller described the interest rate on thenew debt as LIBOR plus 9.75%.

The new second lien credit facilityprovides the necessary capital to executeour near-term plan and close the acquisi-

tion of North Fork at a reduced cost versusthe previous facility, said Scott M.Boruff, Miller chief executive. The terms,flexibility and size of this transaction illus-trate the value of our close relationshipwith Apollo and our ability to attractworld-class new investors, such asHighbridge.

Apollo and Highbridge are both basedin New York.

North Fork historyThe sellers of the North Fork field

included operator Armstrong Cook InletLLC and partners GMT Exploration Co.,Dale Resources Alaska LLC, Jonah GasCo. and Nerd Gas Co.

The North Fork gas field was discov-ered long ago, with a well Standard Oil ofCalifornia drilled in 1965.

The field wasnt brought into produc-tion until March 2011. Armstrong hadacquired the North Fork unit in 2007.

Armstrongs development effortsincluded reworking the original discoverywell, and drilling some new wells.

Miller in November said the purchasewould include six gas wells, a leasehold ofabout 15,465 acres, and Anchor PointEnergy LLC, the owner and operator ofnine miles of twin 4-inch gas transmissionpipelines.

Cook Inlet Energy sees big potential tomore fully develop North Fork with up to24 additional wells. l


Miller Energy closes North Fork purchaseSubsidiary Cook Inlet Energy will operate the Kenai Peninsula natural gas field; acquisition value put at nearly $65 million


FINANCE & ECONOMYShowdown set in Furie Jones Act case

A court battle continues over a $15 million civil penalty the federal governmentlodged against Furie Operating Alaska LLC for an alleged Jones Act violation.

Lawyers for the Department of Homeland Security and Furie are scheduled toengage in oral argument Feb. 13 in U.S. District Court in Anchorage.

Homeland Security officials contend that Furie violated the Jones Act when itused a foreign cargo ship in 2011 to transport the Spartan 151 jack-up drilling rigpartway from Texas to Alaska.

Furie is using the rig for exploratory drilling in Cook Inlet.The company initiated the court case, suing Homeland Security as a preemptive

strike to try to defeat the fine. Furie argues the government lacked a legitimate basisfor imposing it.

The government responded to Furies suit by filing a counterclaim to collect the$15 million.

Furie is asking the court to dismiss the counterclaim, and that will be the subjectof the oral argument.

WESLEY LOY

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some new safety and environmental pro-tection regulations, specific to oil drillingon the Arctic outer continental shelf. Theagencies anticipate releasing the new reg-ulations for public review by the end ofMarch. The regulations will not be final-ized until the public review period is overand until the agencies have revised theregulations based on the comments theyreceive.

And any plans or permits that areapproved face running the gauntlet oflegal challenge through the courts.

Strategic playGiven that since starting its Alaska off-

shore exploration program in 2005 Shellhas yet to complete a single well in eitherthe Beaufort or the Chukchi Sea, peoplemay wonder how much more patience thecompany can have with its frustratingmultibillion dollar venture. But the com-pany has consistently said that it sees theAlaska Arctic offshore as a strategic playfor the long-term future, with the potentialfor major new oil resources, especially inthe Chukchi.

During a media briefing in November,Simon Henry, Shells chief financial offi-cer, confirmed that Shell sees Alaska, inparticular the Chukchi, as a key compo-nent of its long-term plans.

Individually, it is the largest singleexploration prospect in the Shell Group,he said. l



SHELLS PLANS

ENVIRONMENT & SAFETYA look at the longer term for PWS response

Reflecting on experience with recent oil spill response drills held in Valdez, aspart of spill response contingency planning for the Prince William Sound region,U.S. Coast Guard officers told an Alaska Regional Response Team meeting onJan.29 that there may be benefit having futuredrills focus on longer term spill response plan-ning. Traditionally the drills have simulatedthe initial stages of a response, and the activa-tion of resources immediately after a spilloccurs.

The Valdez drills simulate accidentsinvolving tankers carrying oil out of theValdez Marine Terminal.

Oil spill contingency planning needs toconsider worst case oil spill situations, ensur-ing the availability of resources to deal withsuch a disaster, regardless of the likelihood ofa spill on this scale actually happening. But,although recent spill drills have been very successful in simulating the ramp up ofa response immediately after a spill has occurred, a major spill would entail a logis-tical and cleanup effort over an extended period of time, the officers said.

People need to consider drill scenarios perhaps 10 days into an incident, review-ing how the response organization is handling the logistical and other challenges ofa major incident, Capt. Paul Mehler from the Coast Guard told the committee.

Mehler also commented that there is now recognition that, for a major spill, theon-scene federal command within the unified command for the response wouldtransfer from the officer responsible for the Prince William Sound region to theofficer responsible for the broader area of western Alaska. The assumption is that,for a large Prince William Sound response, Anchorage rather than Valdez wouldbecome the center of the massive planning and logistical operation supporting theresponse, Mehler said.

ALAN BAILEY

People need to consider drillscenarios perhaps 10 daysinto an incident, reviewing

how the responseorganization is handling the

logistical and otherchallenges of a major

incident, Capt. Paul Mehlerfrom the Coast Guard told

the committee.

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

Governor seeks OKfor royalty oil salesBills submitted to Alaska Legislature would authorize two-yearcontract to supply up to 15,000 barrels of crude daily to Tesoro


Alaska Gov. Sean Parnell is offeringlegislation to extend state royalty oilsales to refiner Tesoro.

Royalty oil is the states share of oil thatprivate companies produce from leasedstate acreage.

Tesoro operates a refinery at Nikiski, onthe Kenai Peninsula. The plant is one of thestates main sources of gasoline, jet fuel andother products. It has operated since 1969.

Parnell said the sale of royalty oil toTesoro is good for the refinery as well as theeconomy.

Across the state, Alaskans and many ofour industries are impacted daily by the pro-duction of gasoline and other fuels from theKenai refinery, the governor said in a Jan.29 press release. This extension will helpmake sure employment in the KenaiPeninsula region stays strong, while alsoensuring a robust economy for allAlaskans.

Extra contract yearThe state has a long history of selling its

royalty oil to Tesoro and other in-state users.The state also disposes of royalty oil by let-ting the North Slope producers market it onthe West Coast along with their own vol-umes.

Royalty oil sales constitute a major rev-enue stream for the state government, alongwith production and other taxes.

In October, the state Department ofNatural Resources signed a new, one-year

contract to supply between 5,000 and15,000 barrels per day of North Slope roy-alty crude to Tesoro. Subsequently, Tesororequested an amendment to lengthen thecontract for an additional year.

A royalty oil sales contract longer thanone year requires legislative approval.

On Jan. 8, DNR issued a finding that theextended contract would be in the statesbest interest.

The contract as amended will runthrough Jan. 31, 2016.

The state expects to receive at least asmuch money under the contract as if the oilwas marketed on the West Coast. DNR esti-mates the state will collect between $193million and $580 million in royalty revenueduring the course of the one-year extension.

In December, the Alaska Royalty Oil andGas Development Advisory Board passed aresolution supporting the contract amend-ment. The eight-member board, appointedby the governor, is charged with facilitatingwise development of Alaskas oil and gasroyalty interests.

Twin billsParnell transmitted two bills to authorize

the Tesoro royalty oil sales: Senate Bill 146and House Bill 287.

In Jan. 28 introductory letters to SenatePresident Charlie Huggins and HouseSpeaker Mike Chenault, the governor notedthat Tesoros Nikiski refinery is the largesttaxpayer in the Kenai Peninsula Boroughand supplies products to 31 company-owned Alaska retail outlets and 44 brand-

see ROYALTY OIL page 12

http://www.kenworthalaska.comhttp://www.gci-industrialtelecom.com


U.S. Sen. Lisa Murkowski, R-Alaska,is continuing to hammer away at atrio of issues of interest to the oil and gasindustry.

First, she repeated her call for the fed-eral government to lift its virtual ban onexports of domestically produced crudeoil.

Second, she said the Alaska chief ofthe Bureau of Land Management recentlygave her a favorable report on prospectsfor cleanup of so-called legacy wells inthe National Petroleum Reserve-Alaska.

Lastly, the senator said an Obamanominee for a high-ranking post in theInterior Department pledged to improvethe departments permitting process andprovide greater regulatory certainty foroil and natural gas exploration in theArctic.

Export oil?Murkowski is the top-ranking

Republican on the Democrat-controlledSenate Energy and Natural ResourcesCommittee.

She has been outspoken lately in urg-ing the federal government to lift the pro-hibition on crude oil exports.

The ban does have some exceptions.Exports into Canada are allowed, and sois export of Alaska crude. But most if notall Alaska oil is sent to West Coastrefineries, or is used within the state.

Murkowski argues removing theexport ban is necessary to provide arelease valve for surging U.S. crude pro-duction. Lower 48 plays such as theBakken and Eagle Ford are driving thesurge.

The prohibition on crude oil and con-densate exports threatens record-breakingU.S. oil production and American jobs bycreating inefficiencies, gluts and other

dislocations, Murkowski said.The Senate Energy Committee on Jan.

30 held the first hearing in 25 years on theexport ban, which was put in place afterthe Arab oil embargo of the 1970s.

Murkowski believes the Obamaadministration has the authority to lift theexport ban without congressional action.And administration officials have them-selves suggested it might be time for theban to go.

The International Energy Agency haswarned that maintaining the ban mayactually result in shut-in production,Murkowski said. Lifting the ban is aboutincreasing domestic production and creat-ing jobs.

Some in Congress, as well as someU.S. refiners, oppose lifting the exportban. Others, however, believe relaxing theban would be for the best.

I am not saying that President Obamashould open the spigot willy-nilly, AmyMyers Jaffe, of the UC Davis GraduateSchool of Management, said in writtentestimony provided to the committee.But clearly ... our energy situation ischanging and we should not cling to his-torical policies because they are familiarand thereby politically comfortable.

Legacy wellsFederal departments and their contrac-

tors drilled 136 wells and test holes priorto 1982 in the petroleum reserve, a vastNorth Slope tract President Warren G.Harding established in 1923.

These legacy wells dont produce andare now abandoned. State elected offi-cials and regulators say the federal gov-ernment has neglected the sites, failing toproperly plug many wells and clean upsurface junk.

The BLM, which manages the petrole-um reserve, has put together a multiyearplan to remediate the worst of the wellsites.

The agency also has said that half ofthe legacy wells require no action becausethey already have been remediated orpose no threat to people or the environ-ment.

Murkowski has been pushing for fastercleanup, and has worked to line up fund-


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ENVIRONMENT & SAFETYExperts to convene at oil spill symposium

The Alaska Department of Environmental Conservation, or DEC, says that theOil Spill Technology Symposium being held March 6 to 7 in Fairbanks will bringtogether a variety of spill response experts, regulators, emergency responders andenergy producers. Organizations participating in the event include the Universityof Alaska, DEC, NOAA, the U.S. Coast Guard and the Environmental ProtectionAgency. People from oil spill response organizations and industry will participatein the event.

Symposium participants will learn about the latest oil spill response tools andresearch. The symposium will include an overview of the incident command sys-tem, the management framework widely used in the United States to organize aresponse effort. Other presentations will review current and projected researchprograms; the capabilities and limitations of response technologies; commonresponse challenges; and future research needs, DEC said.

The symposium will particularly provide an opportunity for an interchange ofinformation between government agencies, academia and responders on researchneeds, while also helping graduate students better prepare for work in oil spill pre-paredness and response.

For further information and registration in the symposium, contact DEC.ALAN BAILEY

ed outlets operated by franchise owners.This legislation would allow Tesoro to

continue supplying these outlets with fuel,which will help strengthen Alaskas grow-ing economy, Parnell wrote. Tesoro is akey economic engine in Alaska and specif-ically the Kenai Peninsula, employing 200Alaskans in full-time, high paying posi-tions.

Royalty oil supplies only part of Tesorosneeds at the Nikiski plant. The companyroutinely ships in crude purchased fromCook Inlet or North Slope producers, andon rare occasion imports foreign crude. l


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Murkowski pressesmultiple oil issuesAlaskas senior senator urges lifting oil ban, says federalofficials send positive signals on legacy wells, Arctic exploration

see OIL ISSUES page 15

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PIPELINES & DOWNSTREAMValdez council seeks recertification

The Prince William Sound Regional Citizens Advisory Council is seekingrecertification from the U.S. Coast Guard.

The council is a Valdez-based organization that monitors the local oil terminaland associated tanker traffic.

According to a notice published Jan. 22 in the Federal Register, the councilscurrent certification will expire Feb. 28. The council has applied for recertifica-tion through Feb. 28, 2015.

To attain recertification, the council must show it is broadly representative ofthe interests and communities in the area and is adequately fostering the goalsand purposes of the Oil Terminal and Oil Tanker Environmental Oversight andMonitoring Act of 1990, the Federal Register notice says.

Coast Guard recertification policy requires the council to provide compre-hensive information every three years as part of its application, and this is one ofthose years, the notice says.

Congress mandated the council as fallout from the 1989 wreck of the tankerExxon Valdez, which released nearly 11 million gallons of Alaska North Slopecrude into Prince William Sound.

The council has 19 voting members representing local governments and com-mercial fishing, tourism and other groups.

The council conducts research and offers input to regulators and the oil indus-try on such issues as spill response readiness. Sometimes the council takes a crit-ical stance.

Council funding comes from the industry under a contract with AlyeskaPipeline Service Co., the oil company consortium that operates the 800-miletrans-Alaska pipeline and tanker terminal.

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said assets in Alaska are a key part ofExxonMobils international portfolio andtold the committee the Alaska LNG proj-ect was recently moved to ExxonMobilDevelopment Co., which has the duty todevelop megaprojects.

Pat Flood, supervisor of the AlaskaLNG team at ConocoPhillips, said theLegislature must decide whether the statewants to participate and at what share ofits gas molecules, and noted that theadministration needs the ability to workconfidentially with the companies tomove the project forward.

Tony Palmer, vice president of majorproject development for TransCanada,said TransCanada thinks its historic tohave all the parties before the state withan aligned proposal, and believes this is aproject that can compete in the LNG mar-ket. Palmer told legislators some terms ofthe MOU are more beneficial to the statethan terms under AGIA, the AlaskaGasline Inducement Act.

Dan Fauske, president of AGDC, saidAGDC has a project going forward, thein-state ASAP project. The Alaska LNGProject, he said, makes even more sensethan AGDC. But ASAP will continue tomove forward, and if it can be blendedinto the large export project, so much thebetter.

Impression somethings happeningThe consultants, Janak Mayer and

Nikos Tsafos, formerly with PFC Energyand now partners in enalytica, were hiredby the Legislative Budget and AuditCommittee to provide analysis for legisla-tors. Both were part of the PFC Energyweek-long global LNG industry sympo-sium held for legislators in August.

At the time of the symposium, Tsafossaid, the impression was that there were alot of different plans for Alaska naturalgas.

He said the HOA and MOU,announced in January, give analysts theimpression that somethings actually hap-pening.

The HOA covers all segments of theproject while the MOU is about the mid-stream portion.

The midstream could be structuredwith just producer ownership; with pro-

ducer and state ownership; or with pro-ducers, state and a third party, whichinvolves terminating or leveraging theexisting AGIA license, Tsafos said.

Strengths and weaknessesIf the midstream is owned only by the

producers, there is significant potentialfor disputes over allocation of value andsetting the optimal level for a midstreamtariff, Mayer said, as well as expansion,since the focus would be on commercial-izing the producers resources, not that ofthird parties. There could also be uncer-tainty over the tariff for in-state deliveriesof the states gas.

Positives from producer ownershipinclude their proven abilities to executeprojects, but Mayer noted that midstreamis becoming less of a focus for the majors.There could also be issues over workdone to date, he said.

If the state takes an equity position inthe midstream there is more bias forexpansion, Mayer said, but more of a bur-den on the state, with stronger alignmentbetween the state and producers, butreliance on the state to drive expansion.

With the MOU between the state andTransCanada, strong producer-statealignment is maintained, he said.TransCanada would be an advocate for aproject that encouraging expansion andwould have incentive to drive expansion.The state could use its capacity to carrygas to local markets and TransCanadabrings execution knowledge and expert-ise, Mayer said, while the producerswould reinforce cost discipline.

Another bidding round?Mayer said the state could go out for a

new round of bidding for a pipeline part-ner, which could lead to either a lower ora higher rate. Looking back to AGIA,Mayer said there is the question of howmany bidders there would be (only onebid under AGIA, TransCanadas, wasfound to be complete). A new third partywould likely have less influence in cur-rent negotiations, there would be uncer-tainty over the fate of work already doneand HOA negotiations could slow downin anticipation of a new bidding processand license award.

KRISTEN NELSON


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Draft reportThe commission had a mandate to deliv-

er a draft report by Jan. 30, 2014, and tocomplete a final draft of the document andan implementation plan by Jan. 30, 2015.The report that has now been published rep-resents the first step of that mandate.

2014 is the Year of the Arctic for theAlaska Legislature. There is a need to makesure Alaska is in the captains seat as Arcticdecisions are made that will affect allAlaskans today and for hundreds of years,said McGuire when announcing publicationof the draft report. Planting a flag in theArctic is like planting a flag on the moon. Itis an important symbolic message telling usto push boundaries and move with purposetoward Arctic endeavors. This report is agreat step in that direction.

Vision statementsThe Arctic Policy Commissions report

sets out four primary vision statements:valuing community sustainability and thriv-ing cultures; advancing economic develop-ment and a healthy environment; ensuringpublic safety and security; and incorporatingtransparency and inclusion into decisionmaking.

In developing its draft policy the com-mission held public meetings in a number ofcommunities McGuire and Herron told aFeb. 4 joint meeting of the House and Senate

State Affairs committees that they anticipatecontinuing this process in the coming year,sending out teams to glean input from allAlaskans. The commission will need to holda public hearing in Anchorage, the statesmain population center, McGuire said.

Strategic recommendationsThe commissions draft report makes a

series of strategic recommendations, group-ing these recommendations into nine areas:governance and indigenous perspectives;science and research; planning and infra-structure; oil, gas and mineral resources;security and defense; marine transportation;response for search and rescue, and for oil

pollution; energy and power; and fisheriesand wildlife. The commission has addressedall of these areas except security anddefense, an area that the report says warrantsmore attention than the commission hasbeen able to give to it so far.

Recommendations under the heading ofgovernance and indigenous perspectivesinclude the expansion of Alaska participa-tion in the Arctic Council, an intergovern-mental forum consisting of the eight Arcticnations and six groups representing Arcticindigenous people. The commission alsorecommends the continuing development ofprograms that ensure local communityinvolvement in state and federal decisionmaking, including the coordination of per-mits and plans.

In terms of science and research, thereneeds to be increased funding for Arcticresearch in the University of Alaska, thereport says. And state agencies should formagreements with local governments for theuse of traditional knowledge and culturallysensitive practices in research and permit-ting programs.

Arctic development requires a compre-hensive Alaska region economic and infra-structure assessment, integrating local,regional, state and federal planning efforts,the report says. And the state needs toencourage the formation of an inter-agencyand inter-governmental working group toimplement a mechanism for prioritizing andfunding infrastructure construction and eco-nomic development.

Resource developmentThe development of Arctic natural

resources requires regional planning, allow-

ing local stakeholders to communicate theirpriorities to state and federal agencies. Andit is necessary to develop a mechanism forsharing revenue from resource extractionwith impacted communities. Other resourcedevelopment recommendations include thecontinued promotion of oil, gas and mineralexploration and development onshore andoffshore in a manner that is safe; respectspeople and the environment; and meets theeconomic needs of the state, local commu-nities and industry.

During seven hours of testimony on theNorth Slope the commission heard analmost unanimous view that the Chukchiand Beaufort seas constitute the garden ofthe Arctic communities, and that the stateand federal governments should focus on oildevelopment in the Arctic National WildlifeRefuge before conducting offshore develop-ment, Herron told the joint State AffairsCommittee meeting.

Marine transportation requires the devel-opment of integrated systems for monitor-ing and communicating Arctic marine infor-mation.

Emergency and spill responseThere needs to be public and private

investment to support critical aviation andmaritime response infrastructure, coupledwith more adequate funding to enable theU.S. Coast Guard to carry out its emergencyresponse duties in the Arctic, the report says.The efforts of the Alaska Department ofEnvironmental Conservation to involvelocal communities in oil spill response plan-ning and in the maintenance of oil spillresponse equipment need to be expanded.And there should be support for the depart-ments communication with the CoastGuard in reviewing emergency responsecompliance programs appropriate to theArctic.

The state needs stable, long-term fundingmechanisms for weatherization and energyefficiency programs for Arctic buildings,while also continuing to seek long-termsolutions to the issue of the high cost ofenergy for Arctic communities.

There also needs to be an assessment andmonitoring program to support strategies forfish and wildlife management, to improvefood security for Alaska residents. New andimproved public education and awarenessprograms would result in a better publicunderst

Documents

l Flint Hills closing - Petroleum News · the fishing, oil, mining and shipping ... State and feds liaise over Arctic strategies Legislative consultants, parties, start ... This is