BP works to reassure Alaska

Posted: Wednesday, June 30, 2010

John Minge is spending a lot of time these days talking to BP's Alaska employees about the Gulf of Mexico tragedy, reassuring them that the company, as beset as it is, still has a solid business in Alaska.

The same message is being conveyed to the company's contractors and suppliers, who worry that the financial liabilities piling up for BP will take a toll on the company's Alaska budgets and their businesses.

Minge, the president of BP Exploration (Alaska) Inc., said it's tough on morale seeing the company's name in the national media day after day.

The company employs more than 2,000 people in Alaska, and its operations employ several thousand more through contractors and suppliers.

"What I'm doing is talking a lot to our employees, telling them that some of the best resources of the company and the nation have been put to work to bring this Gulf well under control," he said. "I'm telling people that our Alaska business is solid, that we have huge resources and infrastructure here, and if we focus on safety and reliability, we can maintain and even grow our business."

Minge has been to the North Slope six times this year, including spending a week there recently talking and listening to employees in town hall-style meetings and in the cafeterias.

"I tell them that the best thing we can do for BP and Alaska is to focus on doing our jobs safely and efficiently, because that and our continuous improvement will attract new investment and keep our business strong. When people hear that, their confidence returns," he said.

At the same time the company is maintaining its public presence in community activities like the well-known Teachers of Excellence awards and other charitable contributions, Minge said.

"Our future is in our own hands, I tell our employees. We have great people and great contractors. I'm focused on Alaska," he said.

As for the business, Minge said BP has a 2010 capital investment budget of about $800 million, down somewhat from 2009 but still hefty.

"There's a huge amount of work going on," particularly in maintenance and work aimed at ensuring the integrity of infrastructure.

There were 115,000 separate corrosion tests in 2009, as one example, and the level will be about the same in 2010, Minge said. That is more than double the corrosion inspections in 2008. There's a lot of work this year on pipeline replacements, repairs and upgrades of fire and safety systems in production facilities, he said.

In other words, things are in a steady state, Minge said. There are no signals from the company's London headquarters that there will be any big changes in 2011.

That's despite reports that BP will trim its worldwide capital spending as one response to the expenses of the Gulf response.

"We haven't finalized our plans for next year, but we don't anticipate any significant changes. We have a lot of barrels left in the ground here, a long-term plan in place to maintain infrastructure and to drill and work over wells to stem the decline (of production)," Minge said. "There are no indications of a shift away from that strategy."

Claire Fitzpatrick, BP's chief financial officer, who sat in on the interview with Minge, said she doesn't expect any increases in 2011 but no big decreases either.

Alaska is a core-operating asset for BP that provides a big part of the company's worldwide production, but Minge BP's operations are important to the state, too. The company manages oil fields that provide 70 percent of North Slope production and the majority of state revenues.

"Oil pays for 90 percent of the state budget. That means our team is responsible for providing 63 cents out of every $1 in state revenue. We have a huge responsibility to the people of Alaska," Minge said.

BP's Alaska capital investment strategy has three parts, with about one-third devoted to maintaining infrastructure, a third to maintaining production in the existing fields, which includes drilling new wells and working over old ones, and a third in new initiatives designed to grow the business.

This year the company is investing in its new Liberty field development, heavy oil and BP's share of the Denali gas pipeline project with its partner, ConocoPhillips.

Liberty is an offshore field that will be produced with long extended-reach wells drilled laterally from shore. Drilling of the first of these record-breaking wells is expected to begin later this year, Minge said.

The project schedule has slipped a bit because of logistical challenges in getting the Parker Drilling Co. rig ready - the rig is one of the world's largest - but BP still hopes to achieve its goal of starting production in 2011, Minge said.

On heavy oil, the company expects to begin producing the first of four experimental production wells this year on the North Slope. This will be the first attempt at sustained production of oil from the Ugnu heavy oil formation, a huge resource that overlies parts of the western Prudhoe Bay and Kuparuk River fields.

Heavy oil is not a commercial project at this point and is more of a technology demonstration, Minge said.

"These wells aren't economic at this point, but there's a huge resource and the prize is large," he said. "We've had to slow the program a bit, to pace it. We expect to learn a lot from these wells, about flow rates and our ability to handle solids that are produced with this oil."

The goal is to find ways to get production for each of these wells up to 500 to 1,000 barrels a day, he said.

As bright as the potential is for BP on the North Slope, there are challenges for the company as well as for other operators. One is cost.

All North Slope producers, including BP, experienced a huge increase in field costs when oil prices soared two years ago. Activity levels increased sharply in Alaska and worldwide, and contractors and suppliers were unable to keep up with the global demand for services. The resulting industry cost inflation was global.

Oil prices then fell sharply. Costs did not, however.

A lot of BP's focus recently, and that of other producers, has been on cost and efficiency, Minge said. The goal is to find enough efficiency and to boost productivity - not cut budgets, he stressed - so that the company is "cash flow neutral" at a $50 per-barrel oil price.

That means revenues would cover the company's expenditures for operations, maintenance and renewal of infrastructure if oil prices were to drop to $50 per barrel. "We are not there yet," Minge said.

Currently the company would cover its costs at a price of about $60 per barrel, he said. Five years ago the break-even price was $20 per barrel.

"A lot of things have pushed up the break-even price, including inflation, inefficiencies (from the rapid escalation of activity) and taxes," Minge said.

Minge said he is encouraged by recent discussions among state officials and legislators that taxes may have to be reconsidered. When legislators changed Alaska's tax laws three years ago "the pendulum" swung too far in the direction of an aggressive tax system.

The effect of this, unfortunately, has been to make some projects and wells on the Slope uneconomic.

Fitzpatrick, BP's CFO, said the Legislature's agreement to lift a cap on deductions of operating costs from the state's net profits tax has helped a bit. The cap was on cost deductions for the Prudhoe Bay and Kuparuk fields, the largest fields on the Slope.

Minge said Gov. Sean Parnell's proposal to extend tax credits to field development work that results in more production, like workovers of producing wells, was also a good sign. The Legislature didn't approve the proposal, although lawmakers approved the tax credits for work in Cook Inlet. Parnell said he would push his idea again next year, if he is elected in November.

"The governor's suggestion in a step in the right direction. It's reassuring that he is aware of the problem," Minge said.

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