Alaska dials up pressure on ConocoPhillips after it delays controversial Arctic exploration project

Opposition from an Inupiaq village near the U.S. petroleum reserve in Alaska has stopped ConocoPhillips from drilling a nearby exploration well, a move that raises doubts about future exploration efforts at the potential oil play on the North Slope.

“The community is strongly opposed to the project,” said Martha Itta, tribal administrator in Nuiqsut village, on Tuesday.

That opposition, expressed at a meeting in December between village leaders and ConocoPhillips, prompted the oil company to delay plans to drill the Putu 1 exploration well about 3 miles northeast of the village. The company had hoped to drill the well this winter. The village leadership wanted the company to postpone the drilling until next winter, the company has said.

ConocoPhillips’ decision to put the project on hold was a factor in a decision by the state on Feb. 17 to increase pressure on the company to make sure exploration occurs as soon as possible. The area is on leased state land.

Hungry for new oil development amid an unprecedented fiscal crisis, the Walker administration is now pressing ConocoPhillips to fulfill what the administration is calling the company’s “commitment” to drill the exploration well by June.

The pressure is in the form of an 18-page decision, signed by Natural Resources Commissioner Andy Mack, that lays out a strict drilling schedule. He wants production within five years.

Mack also wants ConocoPhillips to put up $12.5 million in performance bonds to protect the state in case the work isn’t done on time, and pay another $1.5 million to replace money the state could have received if it had put the acreage up for competitive bid.

ConocoPhillips can appeal the decision. Mack will not comment on the decision until it is final, a DNR spokeswoman said.

The unusual dispute is brewing around the northeastern edge of the National Petroleum Reserve-Alaska, an Indiana-sized chunk of tundra where major oil discoveries have been announced in the past two years, including by Armstrong Oil and Gas at its Nanushuk prospect, and by ConocoPhillips at its Willow discovery. Those projects together could produce 220,000 barrels of oil daily, the companies have said, greatly replenishing oil production in Alaska from declining Prudhoe Bay fields.

But those developments and other oil and gas activity within 25 miles of Nuiqsut is generating increasing concern in the village over air and water pollution. Large trucks have been hauling gravel from a pit nearby to support oil field development.

The proposed Putu well would have threatened a prized area of the Colville River where subsistence fishermen haul in burbot and other fish for their families, said Itta.

“It’s all around us now, but this would be the closest our village has seen,” Itta said.

“We are not opposed to gas and oil drilling, but we’re for responsible drilling to where our community would benefit from it,” she said. “The companies talk about economic development pushing for these (projects), but we don’t get compensated for health, safety issues and social impacts. All we see is roads, pads, drilling, that’s it.”

The Native village corporation and landowner in the area, Kuukpik Corp., could have financially benefited from the exploration drilling. If the well proved up and oil was produced, the corporation would be eligible to receive a slice of royalties as well.

But Kuukpik was also opposed to the development, said Lanston Chinn, Kuukpik’s longtime chief executive. Villagers already complain about air-pollution from the industrial work around the village. Diesel fumes from drilling would have added to that, with ConocoPhillips “right there just unloading on top of the village,” Chinn said.

“I said, ‘I think you guys need to use your minds to be more creative to find alternative ways in which you can go about drilling — a different location or a different methodology,’ ” Chinn said.

ConocoPhillips has said little publicly. The decision postponing drilling “was a collaborative process with Nuiqsut leaders that recognized the need to balance the drilling opportunity with the needs and support of the community,” said Natalie Lowman, communications manager for ConocoPhillips Alaska.

She said in an email Tuesday that the company will work with the community and the North Slope Borough to address concerns over drilling ahead of the 2017-2018 exploration season.

Chinn said the company can move the drilling site and explore the same section of the reservoir using lateral drilling. The company has not agreed to do that, he said.

“So by not being a little more progressive about doing things, what they’ve done is it looks to me like the state is giving them the boot,” Chinn said.

Companies for years have failed to meet their exploration commitments for the oil play near the village, the state has said. ConocoPhillips got its leases when it said it would drill in the increasingly prospective area.

But after ConocoPhillips announced its intent to delay drilling until next winter, Mack took a tougher approach. In his Feb. 17 decision, he rejected ConocoPhillips’ request to expand the Colville River oil unit to absorb the Putu exploration area. That would have added 9,150 acres to the unit.

Mack expressed concern in the Feb. 17 letter that ConocoPhillips would not quickly drill the well.

“In light of Conoco’s inability or reluctance to proceed with the promised drilling this year, the commissioner is highly concerned that including this acreage in (the Colville River unit) will indeed allow more expeditious development than if the acreage was offered for lease in a competitive sale,” he wrote.

Mack said he will grant the unit expansion if ConocoPhillips provides a $2.5 million performance bond that the state could claim if ConocoPhillips doesn’t drill the exploration well by May 31. As part of this bond, the company must drill a second well next year if the first effort turns out to be a “dry hole,” he said in the decision.

Mack also wants another $10 million performance bond that could be cashed if ConocoPhillips does not bring the field into production by May 31, 2022.

And, Mack said, he wants ConocoPhillips to provide $1.5 million to DNR as payment to replace bid income the state isn’t receiving.

ConocoPhillips is still reviewing the decision, company spokeswoman Lowman said on Tuesday.

The company has until March 12 to formally ask Mack to reconsider his decision.