North Slope oil firms bet on heavy oil

Soaring prices are helping make once-marginal crude more profitable

Posted: Monday, April 18, 2005

PRUDHOE BAY - BP and ConocoPhillips are betting that heavy oil in Alaska will result in a big payoff.

Heavy oil - which has the consistency of thick molasses instead of olive oil - lies in sandstone above the huge reservoir of North Slope light oil that has been flowing down the trans-Alaska pipeline since 1977. With the reservoir being drawn down, the companies are turning to hard-to-pump heavy oil to extend the life of the oil fields.

Viscous oil makes sense because of increases in worldwide oil demand, said Phil Flynn, senior energy analyst for Alaron Trading Co., a Chicago-based futures brokerage firm.

"These alternative fuels that we thought just a few years ago would never be profitable to get out of the ground, at $50 a barrel it is," Flynn said. "We are going to find more and more situations where we are going to squeeze every barrel out of the ground."

The companies describe their joint effort as unprecedented. So far, they've spent over $1 billion on heavy oil and are putting millions more into the effort.

"Mother Nature put something like 15 billion barrels in place," said Don Dunham, who is heading up BP's North Slope strategy on viscous oil. "The issue is to avoid leaving it in the ground."

Until recently, the companies have been satisfied with light oil - the more easily pumped crude that has been the lifeblood of Prudhoe Bay for nearly 30 years. But the huge oil field - originally estimated at 25 billion barrels - is being drawn down. Production is falling at about 3.5 percent a year and the pipeline now carries about half what it did in the 1980s. Alaska oil accounts for about 17 percent of total crude oil production in the United States.

With the beginning of the end in sight, BP and ConocoPhillips are willing to spend big on viscous. But the question remains: How big a payoff?

"We believe these developments are economically viable," said Matt Fox with ConocoPhillips. "The issue is how much can be developed economically."

Prudhoe - the largest of the North Slope oil fields - is more than 213,500 acres of flat tundra 300 miles above the Arctic Circle near the Alaska coastline. It has more than 1,000 oil wells.

BP is focusing its efforts at Milne Point, a field west of Prudhoe developed by Conoco and now 100 percent owned by BP. Work on viscous also is being done at BP's Orion and Polaris satellite fields at Prudhoe.

ConocoPhillips is concentrating its efforts at the West Sak oil field, also west of Prudhoe. The companies in 2004 announced that approximately $500 million would be spent to expand the West Sak operation, including the drilling of 44 wells.

ConocoPhillips operates the field and owns 52 percent. BP owns 37 percent, with ExxonMobil, Unocal and ChevronTexaco making up the rest.

Current production at West Sak averages about 10,000 barrels a day, but the companies would like to see that increase to 45,000 barrels a day by 2007.

In five years, viscous production on the North Slope should be about 100,000 barrels a day, Dunham said. The pipeline now carries about 900,000 barrels a day, well below the peak of more than 2 million barrels a day in 1988.

The time has come to go after the tough stuff, said Scott Digert, one of the leaders of BP's viscous project.

"It is a big part of our strategy," he said.

BP and ConocoPhillips are each pumping about 30,000 barrels of viscous a day. ExxonMobil has a smaller operation to bring the combined daily production total to about 75,000 barrels a day.

BP and ConocoPhillips want heavy oil to help keep the pipeline somewhat full until a natural gas pipeline can be built, a $20 billion proposed project that is at least a decade away.

After North Slope natural gas gets going, viscous should account for between one-quarter and one-third of the oil produced on the North Slope, Digert said. Between natural gas and viscous, the life of the oil fields could be extended until 2050 and beyond, company experts say.

Advances in drilling technology, along with the high price of oil, are making viscous possible. Challenges remain, however.

"We are producing the easiest of the difficult stuff. It only gets more difficult after this," Fox said.

Drilling for heavy oil used to involve a straight shot, just one hole that went down about 4,000 to 5,000 feet and opened up 75 to 100 feet of oil-laden sands. For viscous to make economic sense, more area needed to be available off the main hole. That's where lateral drilling comes in. A well with three to five laterals can open up 25,000 feet of sand.

Computer-driven drill bits that snake through the sandstone, going from one pocket of oil to the next, also are taking a lot of the guesswork out of drilling. Technicians can now keep a drill bit within bands of sand only 10 to 15 feet thick 90 percent of the time, extend out 1.5 miles, and still hit a target within about the size of a large door frame.

Lateral drilling is expensive, about three times the cost of horizontal drilling. But with lateral drilling the well as a whole can produce enough so that viscous can be cost effective, Digert said.

The companies are going after the viscous in the western North Slope fields because at between 70 and 90 degrees it is a little easier to pump than oil to the east, which at only about 40 degrees really doesn't flow. By comparison, light oil is slippery at 200 degrees.

The companies continue to struggle with the heavy oil sand problem. Sand slows the flow and clogs the equipment, sometimes forcing expensive shutdowns lasting a day or more.

"We have to find the maximum rate without filling it full of sand," Digert said.

Getting the oil to separate from the sand also is a big challenge. The companies are trying a variety of techniques, including heat, water infusion and various emulsions called de-oilers and de-sanders.

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