Caelus oil discovery is good news, but let's not celebrate yet

Shucks — just when Alaskans are starting to take our state's huge financial problem seriously, someone finds a bunch of oil.

Last week's announcement by Caelus Energy that it had found a large oil accumulation on the North Slope is really good news. But it shouldn't give our legislators an excuse to chicken out again on some tough fiscal decisions.

Need for caution

For one thing, we have to view Caelus' find with a certain caution. The 6 billion-barrel figure, for example, is oil in place, or the fluids locked in the reservoir rock. Getting it out of the rock is the trick. Caelus estimates that oil "recovery," or the oil actually produced, will be about 35 percent of oil in place, or just under 3 billion barrels.

[Caelus claims Arctic oil discovery that could rank among Alaska's biggest ever]

That's still great. It's not the 9.6 billion barrels recoverable first announced for the super-giant Prudhoe Bay field, but it's a lot. Over time oil recovery always grows too, as companies apply new technology. Prudhoe is now expected to see about 13 billion barrels recovered, for example.

Another word of caution, however: Caelus' estimates are based on results from two test wells. Neither had actual production tests to see if oil will really flow. That will come in a third test well planned for the winter of 2017-1018, the company has said.

The current estimate of oil recovery is based on a lot of well data and science in which the company has confidence, but Caelus will really know, it acknowledges, with the actual flow test.

Meanwhile, analysts with independent consulting firms, like Wood Mackenzie, are withholding judgment on Caelus until the flow test is done. We mention this because there have been nasty surprises for companies after discoveries and even when development plans are far along.

The small Badami field and the larger Lisburne field on the North Slope are examples. There were high expectations for both. Production wells were drilled and oil processing facilities and pipelines were built. But when the wells were turned on, the reservoir did not produce what was expected.

This is particularly a concern because Caelus' find was mostly made in the Torok formation, a geologic feature found widely across the North Slope and which appears to hold a lot of oil. But the formation is complicated, and Caelus acknowledges the rock quality is not as good is it could be. Some geologists worry there could be undetected layers of shale that could be barriers to the flow of oil. Flow tests in the next exploration well will answer some of these questions, but not all.

Tough location

It's too early to put a real number to the development cost. Caelus' initial estimate is $8 billion to $10 billion, but these numbers tend to grow. The remote location of the discovery is the big challenge, as Caelus appreciates.

Smith Bay is 90 miles northwest of the Alpine field, the nearest producing field with infrastructure. A pipeline from the location would be about 125 miles long if it followed an offshore route, which Caelus plans.

Offshore waters are very shallow in Smith Bay and along the route of a pipeline, which will be buried, and that will protect the production facilities and the pipeline from offshore moving ice. That is a big advantage for Caelus.

One disadvantage is that gravel is scarce in the region, making the industry's traditional approach in building oil fields in shallow waters with artificial gravel islands a challenge.

The company is proposing a novel solution, bringing in production facilities including oil and gas processing plants by sea on large barges. The barges would be lowered to the seafloor, just a few feet down, to become more or less permanent. A big advantage of this approach is that the barges, and the production facilities they will carry, can be removed and salvaged after the field is depleted.

These ideas are not new. Offshore production facilities are built and operated elsewhere including in Alaska at the Northstar field operated by Hilcorp Energy. But they have not been done on such a large scale in the Arctic, which will bring special scrutiny by environmental regulators.

Long way to pipe

The long distance of the buried offshore pipeline will be another challenge for the regulators. Smith Bay is a long way from anywhere. Pipelines from Arctic offshore fields have been built and operated successfully, but they are for short distances. The pipeline to shore from the Northstar field, for example, is 6 miles.

Pipelines from Caelus' own Oooguruk field and Eni's Nikaitchuq offshore fields, both a few miles off the onshore Kupuruk River field, are similarly very short. Regulators will pay special attention to Caelus' ability to detect a leak of oil from the pipeline into the ocean, and the company's ability to test for pipeline corrosion.

Smith Bay and the route of the pipeline is also a concern for the Inupiat communities of the Arctic who depend on bowhead whales for subsistence. These whales migrate along the Alaska Beaufort Sea coast in the fall and feed in Smith Bay, and partly because of that leak detection will be a particular concern for the North Slope Borough, the regional municipality, and the federal and state agencies.

When BP built the Northstar pipeline, the company employed a novel technology for detection of small leaks, which are hard to detect. Whether that can be installed on a larger scale for Caelus' offshore pipeline is uncertain, but there will be a lot of discussion on leak detection.

What is ironic about this is that the safest pipeline route would be to bring the oil to shore, a very short distance, and then over land, perhaps tying into pipelines that will be built in NPR-A by ConocoPhillips to connect its GMT-1 oil production sites in the reserve.

However, the U.S. Interior Department, under pressure from environmental groups, has established areas of special protection along the NPR-A northern coast that are very restrictive. Going onshore may not be a practical option for Caelus. The federal government may have forced Caelus to stay offshore. I would argue the onshore environmental issues can be managed more easily.

Much oil remains

These are concerns, and another  is yet more changes to state oil and gas taxes, but these are problems that can be solved. The really good news about Smith Bay is that Caelus has shown there is a lot of oil around on the North Slope. Developing it will not be as profitable for the industry and the state as the early, big discoveries at the Prudhoe Bay and Kuparuk fields, but the added flow of oil will help keep the Trans-Alaska Pipeline System operating, and that is really important.

[Caelus Energy CEO calls offshore Arctic oil discovery a game-changer]

TAPS is now moving just over 500,000 barrels a day, a fourth of its original capacity, and oil production from the North Slope is gradually declining. New oil from Caelus or Armstrong Oil and Gas, which has made another discovery, could delay the point where oil throughput declines and the pipeline cannot be economically operated.

That's the real danger. If TAPS shuts down, the lights turn off in the North Slope oil fields, and a big part of our state's economy will be lost.

Tim Bradner is editor of Alaska Inc., a quarterly magazine, and the Alaska Economic Report.

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.