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Petroleum Producers Wait in Anticipation on Heavy Oil Break

February 15, 1996

JUNEAU, Alaska (AP) _ Alaska oil producers are stuck in that old ketchup commercial _ thick, red tomato paste hovering on the lip of the bottle as Carly Simon sings ``Anticipation.″

Only in this case, it’s thick, black gold waiting underground in huge deposits on the state’s Arctic coast as Alaska lawmakers consider whether to grant the economic incentive oil companies say they need to start pumping it out.

With the North Slope’s thinner, more accessible oil deposits gradually drying up, developers want to sink new wells to go after largely untouched supplies of ``heavy oil,″ a lower-grade petroleum that costs more to produce.

Oil producers say they have tried unsuccessfully for years to pump heavy oil profitably in Alaska, where cold and long distances make it a money-loser. A new bill would help reduce costs by giving oil companies a five-year reprieve from paying state royalties on heavy oil.

``It’s sort of a pincer movement,″ said Heather Rowland, managing director of the Global Oil Group, a New York-based consulting firm. ``In Alaska you’ve got higher production and transportation costs to move oil that’s of a lowish value.″

Heavy oil production worldwide averaged 4.2 million barrels a day in 1995, accounting for about 6.7 percent of the petroleum market. Production is largely centered in warmer climates such as California and Venezuela, where the oil pours more easily.

``It is just like a Heinz ketchup thing,″ said Ed Behm, heavy-oil team leader for Texas-based OXY USA Inc., a division of Occidental Petroleum Corp., which has a small stake in a North Slope oil field with British Petroleum.

The two companies say they are poised to invest $550 million over the next nine years drilling 230 wells to tap a heavy-oil deposit at Milne Point, just west of the vast Prudhoe Bay oil fields that have been the mainstay of Alaska’s economy for 20 years.

The five-year break on royalties _ which would free developers from paying the state its standard 12.5 percent cut on the value of oil _ probably would be enough incentive to make those fields profitable, the companies say.

Drilling could begin by the end of the year if the state approves the deal, Behm said.

The proposal would allow developers to produce up to 500 barrels of heavy oil a day from each well, royalty-free, with the state collecting its standard cut on anything above that volume. Since heavy oil pumps slowly, though, most wells would stay well under 500 barrels a day.

After five years, the state would begin to get full royalties on all heavy oil for the life of the wells, which could produce for as long as 40 years.

The Milne Point fields ultimately could produce 300 million barrels of heavy oil, bringing in $425 million in royalties to the state, according to BP and OXY. Without the royalty incentive, the companies say, most of that oil would remain in the ground.

The royalty break faces opposition from Gov. Tony Knowles, who prefers his own incentive measure implemented last year to encourage development of marginal oil fields.

The heavy-oil bill would be a blanket concession to industry, giving the state no leeway to determine if companies really need the incentive, said Ken Boyd, director of the state oil and gas division. Knowles’ measure provides for a review by state oil experts, who could grant royalty reductions as low as 3 percent, he said.

Oil companies say such reviews could take too long and leave too much uncertainty to plan investments.

Boyd also said there is no guarantee oil companies would continue producing heavy oil after the five-year free ride on royalties. Developers, though, said they would just be recouping their investment by then.

``You go out and buy a business and after five years of blood, sweat and tears, you get it where you’ve paid off the capital investment and you’re finally getting your payday,″ said Bruce Policky, reservoir development manager at Milne Point for BP Exploration (Alaska) Inc. ``Why would you pack it in after all that?″

Other oil producers are awaiting the outcome of the incentive debate. ARCO Alaska Inc. estimates it could produce 500 million barrels of heavy oil at its West Sak development near Prudhoe Bay, though company spokesman Ronnie Chappell said ARCO still would need to reduce production costs even with the incentive.

If it can be drilled profitably, heavy oil could help prolong the life of Alaska’s North Slope oil fields for decades, developers say. Barring new petroleum strikes, the amount of oil flowing through the 800-mile trans-Alaska pipeline could hit a critical low within 15 years, when it may no longer be operational.

``There’s no question we want to keep oil in the pipeline,″ Boyd said. ``The more oil in the pipeline, the longer you keep it open, the more time you have for people to keep looking for more oil.″

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