Eni's Offshore Leases to be Modified

Maritime Activity Reports, Inc.

November 12, 2007

State officials are negotiating modifications of state oil and gas royalty terms on offshore Beaufort Sea leases held by Eni US Operating Inc. Most of Eni's leases on the project now require a 16.6 percent royalty on gross production revenues. Some leases are 12.5 percent gross royalty with an additional 30 percent share of net profits paid to the state. Eni is proposing to develop heavy oil from one shallow reservoir interval and conventional light oil from a deeper reservoir section in the project, which underlies shallow waters offshore the producing Kuparuk River field on the North Slope. Eni has told state officials it hopes to secure corporate approval for development by the end of 2007 and have Nikaitchuq in production in 2009. On Oct. 5 the state approved an expansion of the Nikaitchuq Unit for Eni. The unit originally consisted of eight leases Eni owned that covered 12,968 acres. The larger unit includes an additional 10 leases also owned by the company, bringing the unit area to 18 leases covering 33,870 acres. Nikaitchuq is located just to the east of Oooguruk, a similar offshore project owned by Pioneer Natural Resources Inc. that is now being constructed. Oooguruk is expected to begin production in 2008. The two projects are in shallow water and are virtual twins of each other, except that Oooguruk is farther offshore, at about five miles, and has production wells placed on an artificial gravel island, while Nikaitchuq will have many of its wells drilled from shore with some wells drilled in a later phase on an artificial island about three miles offshore. Pioneer applied for and received a lower state royalty on leases for Oooguruk, but a similar proposal for reduced royalty for Nikaitchuq was denied in 2006 after the state passed a new production tax law with investment tax credits. In rejecting the application, the state said the new tax law improved the profitability of Nikaitchuq to the point that a reduction in royalty was no longer justified. The previous application was submitted by Kerr-McGee, which owned a majority share of the project before selling it to Eni, which previously held a minority interest. In its decision to approve the expansion of the Nikaitchuq Unit, the state said a delineation well drilled to further define the Nikaitchuq reservoir helped firm up Eni's assessment that the prospect is commercial. The Legislature is also currently considering another revision of the production tax, however. Although it is unlikely the investment tax credit will be significantly altered the overall tax rates are likely increase. These changes could influence the state's decision on Eni's new application, and the company's ultimate decision to move forward with the project. Based on information in documents accompanying the state's decision on the unit expansion Eni's development plan with Nikaitchuq involves extended-reach horizontal wells drilled from a new 313,000-square-foot gravel pad to be built onshore at Okitok Point, north of the Kuparuk field. Future development drilling would be done from a small artificial gravel island constructed offshore, in shallow waters protected from moving ice by barrier islands. A “three-phase” pipeline would carry oil, gas and water from producing wells to an onshore processing facility that would be owned by Eni. Kerr-McGee had originally proposed a 14-mile onshore pipeline to connect the new processing plant to existing Kuparuk field pipelines and a 3.8-mile offshore pipeline when the satellite gravel production island is built, but these configurations may change in Eni's revised plan. A significant difference between Eni's project and the Oooguruk project now under construction by Pioneer is that Pioneer proposes to use facilities owned by the Kuparuk River Unit owners ConocoPhillips, BP and ExxonMobil for processing raw crude oil, where Eni will build its own processing plant. Reaching agreement with the three Kuparuk owners on use of field facilities, which have spare capacity, has been a challenge for Pioneer, however, and an agreement has not yet been signed even though the $500m-plus Oooguruk project is more than halfway through its construction. [Source: http://www.alaskajournal.com]
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