Alaska’s next big North Slope oil project is mired in a feud with ConocoPhillips, and reportedly for sale

The fallout from a merger deal and a multimillion-dollar dispute with ConocoPhillips over road access are threatening to snag one of Alaska’s biggest new North Slope oil developments.

The $3 billion Pikka project could ultimately boost the flow of oil down the trans-Alaska pipeline by 25%, and it faces less opposition from conservation groups and Indigenous residents than other major North Slope developments.

But last month, a news outlet in Australia — home of the project’s new owner, Santos Ltd. — reported that the company has put its 51% stake in Pikka up for sale.

Around the same time, Santos’ Alaska subsidiary, Oil Search, complained that ConocoPhillips is demanding “exorbitant” fees, totaling hundreds of millions of dollars, in exchange for allowing vehicles to cross its roads that connect the North Slope’s Prudhoe Bay oil hub with the new Pikka prospect.

Without guaranteed road access, Oil Search cannot proceed with its final investment decision for the first phase of the Pikka project, the company said in a letter last month to the Alaska Department of Natural Resources. That decision — the green light on whether to actually build the development — is currently scheduled for the middle of this year.

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The twin developments have been rippling through Alaska’s oil industry and its political landscape, and frustrating some observers who have grown anxious to see Pikka advance as activists convince a growing number of banks and insurers not to finance Arctic oil.

“It’s writing on the wall when we talk about the state’s competitiveness,” said Utqiagvik independent Rep. Josiah Patkotak, who chairs the Alaska House Resources Committee. “It underlines what has been said over the past number of years, as far as Alaska’s North Slope becoming less and less of an attractive investment.”

Industry boosters look to new petroleum projects to sustain jobs and minimize per-barrel costs of shipping oil down the Alaska pipeline, as output falls from older developments.

Pikka would produce 80,000 barrels a day from its first phase, with the possibility of expansion. It has been Alaska’s most promising project lately, as the other major development on the North Slope’s horizon, Conoco’s Willow prospect, has been delayed by litigation and a new Biden administration environmental review.

Neither ConocoPhillips nor Santos would comment on the developments surrounding Pikka. But others are more optimistic about its fate, and the future of Alaska’s fossil fuels.

Natural Resources Commissioner Corri Feige said she has “full faith” that ConocoPhillips and Oil Search will reach an agreement over road access, and adds that she does not expect the issue to be a “significant factor” in Pikka’s development.

“As the first major oil development on state lands in over a decade and one of the largest new finds on the North Slope, Pikka is both exciting and very important to Alaska,” she said.

Pikka’s prospects were announced several years ago by a renowned wildcatter, Bill Armstrong. His company discovered the 750-million-barrel deposit in a geologic formation, Nanushuk, that other oil explorers had drilled through more than 100 times without detecting major petroleum deposits.

Oil Search, which was based in Papua New Guinea, bought Armstrong’s stake in an $850 million deal announced in late 2017. Executives said they expected their experience working with Indigenous communities in the tropics would translate to working in Native communities on Alaska’s North Slope.

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But Oil Search officials have said they struggled to raise the money to finance the project amid climate activists’ anti-Arctic oil campaign. And a merger last year with Santos, a larger Australian oil company, raised questions about whether the new firm would stick with its Alaska investment — its only asset in the Northern Hemisphere.

Publicly, Santos officials have said they’re focused on advancing Pikka toward a final investment decision, which they describe as the best way to maximize the project’s value — whether it’s ultimately sold off to another company or advanced to construction as a Santos project.

But the Australian Financial Review reported last month that Santos has partnered with investment bankers to pitch its entire 51% stake in the project to “rival oil and gas companies and private equity firms,” including major North Slope players like Hilcorp and ConocoPhillips.

Alaska government officials have launched their own lobbying effort to push back against the anti-Arctic campaign, with Senate President Peter Micciche and Revenue Commissioner Lucinda Mahoney discussing the issue with financial institutions in New York City last week.

Oil Search and Repsol, a minority owner in the project, have both touted the fact that the greenhouse gas emissions tied to Pikka’s construction and operations would be lower than that of most other projects around the world. That’s in part because it ties into existing pipelines and other infrastructure that doesn’t have to be built new, and it would also create its electricity with cleaner-burning natural gas generators.

“No doubt Alaska companies face challenges in getting the banks to understand how a dollar invested in a barrel of oil in Alaska generates way more value to the people of the region and the state than, perhaps, a dollar invested in other areas of the world,” said Feige. “But continuing to educate them to that fact will make a difference. I think the next few months will see a lot of change in the investment space and how they view energy globally.”

Hilcorp declined to comment on whether it has been approached by Santos about Pikka, and ConocoPhillips spokeswoman Rebecca Boys said the company does not comment on “commercial matters.”

Hilcorp appears to be an unlikely customer: Its acquisitions tend to be aging infrastructure where the company can profit from increased efficiency, rather than new fields that still have to be built.

Experts say that Conoco would be an obvious possible buyer, as Pikka is between two of the company’s existing fields, Alpine and Kuparuk. “Synergies” between Pikka and the Kuparuk field would likely lower Conoco’s construction costs compared to Oil Search, said Janet Weiss, a former top BP executive in Alaska.

“It would make a lot of sense if they’re talking to Conoco,” Weiss said.

At the same time, however, Oil Search has been mired in disputes with Conoco over both road access and state authorizations needed for a seawater treatment plant that would be part of the Pikka development.

Conoco, which has its own treatment plant in the same area, raised extensive objections to a state approval needed for Oil Search’s seawater plant.

In comments submitted to the state, Conoco argued that Oil Search’s plant, combined with emissions from Conoco’s own infrastructure in the area, would cause air pollution to exceed allowable levels — and potentially interfere with Conoco’s operations in the same area.

Republican Gov. Mike Dunleavy’s administration nonetheless approved an easement for the seawater plant in December. Now, the focus of the dispute has turned to the issue of road access, and under what terms Oil Search can access Pikka by using the gravel roads that Conoco has built on land it has leased from the state for its own existing oil developments.

Oil Search, in correspondence with Dunleavy’s administration, said it initially proposed to pay Conoco an estimated total of $60 million to support maintenance and capital expenses.

Conoco responded with its own proposal that could have required Oil Search to pay more than $600 million over a 30-year period, or more than $20 million a year, Oil Search said.

With negotiations between the two companies stalled, Oil Search is now trying another tactic: It applied last month for a “miscellaneous land use permit” from the Department of Natural Resources that would authorize the company to travel on Conoco’s roads.

Oil Search argues that Conoco’s oil leases from the state do not allow it to keep other companies off its roads, that using existing infrastructure would minimize environmental impacts and that other North Slope operators don’t assess fees for travel across their leases.

“State oil and gas leases do not entitle the holder to exclusive use of associated lands,” Oil Search Senior Vice President Joe Balash, a former state natural resources commissioner, wrote in his permit application letter. “Assessing an access fee for access and use of gravel roads on state lands does not promote exploration or development.”

Conoco, in previous correspondence with the department, said the state cannot order the company to make its roads through the Kuparuk River Unit, or KRU, available to Oil Search without compensation. It also said that the state cannot set the amount of compensation itself.

“A nonconsensual appropriation of KRU roads or other facilities would be a textbook taking,” Conoco said in its letter, sent in November. Conoco added that if Oil Search uses KRU roads without an agreement, Conoco has “practical physical measures and legal remedies” that it could use as necessary.

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The feuding between the two companies has frustrated one stakeholder: Kuukpik Corp., the Alaska Native village corporation whose shareholders have ties to the nearby Iñupiaq village of Nuiqsut.

Kuukpik, whose shareholders have struck lucrative deals with the oil industry in the past, strongly supports the Pikka project and is “becoming concerned with some of the things we’re hearing,” said Andy Mack, the company’s chief executive and another former natural resources commissioner for the state.

Kuukpik doesn’t assign blame to either company involved; it just wants to see their dispute resolved, Mack said.

“There’s higher principles at play here than two companies, neither of which is based in Alaska, disagreeing about commercial aspects of their various projects,” Mack said. “That is completely subsumed, and, frankly, not nearly as important, as the rights of Alaska Natives to do what they want with their land.”

Feige, the current natural resources commissioner, said her agency is encouraging the two companies to continue negotiating while Oil Search’s permit application is pending.

The access that companies have to their state leases for oil development, she added, is a “nonexclusive right that is retained by the state to grant.”

“But one company had to pay to build the road in the first place,” Feige said. “And fairly recognizing that property right can be complicated.”