Conoco at Milne Point Oil field Alaska

Last addition to this page on: July 21, 08

In the 1970's, 80's and 90's, the big 3 oil companies on the North Slope of Alaska (Arco, BP and Exxon) owned shares of the Trans Alaska Oil Pipeline.
Conoco came to the North Slope and started producing some oil at Milne Point in 1985.
Conoco did not own a share of the oil pipeline.
Conoco gave up and left the North Slope in 1993.
Was Conoco forced out by pipeline tariffs that were too high?
Or were there other factors? Yes, there were other factors.

Some people are against the oil companies owning a Trans Alaska Gas Pipeline.
They say we (Alaskans) don't want to repeat the "mistake" of the Trans Alaska Oil Pipeline being owned by the producers (oil companies).
They say look at what happened to Conoco at the Milne Point oil field.

The Trans Alaska Oil Pipeline is an engineering marvel.
It was completed in 1977 and ended up costing $8 billion.
It has operated very well from 1977 to the present (2008).
Billions of dollars have flowed into the Alaska State treasury beacause of it
The Oil companies paid for the construction of the "Haul Road" from the Yukon River to Prudhoe Bay (now called the Dalton Highway).
The Haul Road was built in 1974. The Oil companies then paid for and built the Trans Alaska Oil Pipeline.

A very powerful magnitude 7.9 earthquake struck along the Denali Fault in Interior Alaska on Nov. 3, 2002. The ground along the fault moved an estimated 18 feet horizontally and nearly 2.5 feet vertically. It was centered only 50 miles from the Pipeline. The pipeline went through it fine with no leaks, as it was designed to do.

The Alaska North Slope producers would do an excellent job in building an Alaska Gas Pipeline.
They have the best chance of actually getting it done.

Some of the critics of the oil companies say that the tariffs on the oil pipeline have been too high.
They say independent oil companies (those that don't own a share of the oil pipeline) have been discouraged from exploring on Alaska's North Slope.
However, the Federal Energy Regulatory Commission is supposed to have the final say as to what the tariffs should be.

Conoco developed the Milne Point Oil field and started flowing it in 1985.
Milne Point is located 35 miles west of Prudhoe Bay, Alaska and north of the Kuparuk oil field.

By the way, Conoco in 1985 was not precisely the same company as ConocoPhillips of today. The legacy of ConocoPhillips goes way back into Alaskan history, because it is a combination of Conoco, Arco Alaska and Phillips.

Milne Point was a difficult oil field.
It has been described as geologically complex, quirky and marginal. The most that Conoco was able to pump out of it was about 19,000 barrels of crude oil per day.

Comparison of oil production in 1993
Oil Field	Barrels of crude oil per day
Milne Point (operated by Conoco)	18,000
Kuparuk	316,000
Prudhoe Bay	1,193,000

Waterflood to coax oil out of the ground. - Expensive
Conoco had to apply waterflooding at the beginning of production in 1985, in order to help get the oil out of the ground at Milne Point. This means that some of the wells were used to inject water into the ground so as to try to push the stubborn oil through the formation and then up through other regular oil wells. This adds a great deal of expense.

Price of oil crashes in 1986.
In 1987, Conoco suspended production at Milne Point because the price of oil crashed.
Conoco brought Milne Point back on in 1989.

Prices are given in nominal dollars (actual dollar figures at the time, and not adjusted for inflation). These are the best figures that I have been able to come up with so far, but they are not adequately cross checked. See the note at bottom of page for the data sources and discrepency details.
Year	Crude Oil Price Dollars per barrel	Tariff - Trans Alaska Oil Pipeline. Dollars per barrel. From Prudhoe Bay to Valdez, Alaska
1977	14.40	6.26
1978	14.95	6.26
1979	25.10	6.26
1980	37.42	6.26
1981	35.75	6.21
1982	31.83	6.21
1983	29.08	5.90
1984	28.75	6.13
1985	26.92	6.01
1986	14.44	4.58 (4.61~)
1987	17.75 (ANS 17.31)	3.91 (3.34~)
1988	14.87 (13.51)	3.18 (3.33~)
1989	18.33 (17.13)	(3.33~)
1990	23.19 (21.47)	(4.11~)
1991	20.20 (17.21)	(4.03~)
1992	19.25 (17.44)	(3.47~)
1993	16.75 (15.45)	(3.16~)
1994	15.66 (15.20)	(3.74~)
1995	16.75 (16.93)
1996	20.46 (20.44)
1997	18.64 (18.98)
1998	11.91 (12.55)
1999	16.56 (17.78)
2000	27.39 (28.26)
2001	23.00 (23.21)
2002	22.81 (24.72)
2003	27.69 (29.64)
2004	37.66 (38.84)
2005	50.04 (53.48)
2006	58.30 (64.43)
2007	64.20
2008

The State of Alaska charged Conoco a heavy royalty of 20% at Milne Point.
In most of the other North Slope oil fields, the state imposed royalty was 12.5% which is less.
Conoco tried for a long time to get the state to lessen the royalty burden, but the state would not do it.

Finally in 1993, Conoco decided to trade Milne Point and its Badami prospect (east of Prudhoe Bay) to BP for BP properties in the Gulf of Mexico.
BP invested hundreds of millions of dollars more into Milne Point, and along with some innovative techniques managed to start increasing the production rates.

The Big 3 oil companies owned shares of the oil pipeline, but Conoco did not. So when Conoco paid the tariff for the transport of the Milne Point oil, the money did not flow back into their pocket, since they were not an owner of the pipeline.
However, Conoco didn't shell out any of the money to build it, and they weren't involved in the day to day expense of operating and maintaining it.

The main problem for Conoco at Milne Point is that they were unlucky to be sitting on a formation that was difficult and quirky. If they had been able to produce 40,000 barrels per day (as they no doubt hoped), instead of just 19,000 barrels per day, then they would have had more revenue to pay for their fixed costs.

Low oil price. If the price of oil hadn't been so low, that would have helped them.

So when a project is barely keeping its head above water, any expense can sink them, whether it is labor, construction costs, high state royalties, pipeline tariffs, engineering costs, arctic opertion costs, etc.

It's not fair to just single out oil transportation costs (pipeline tariffs) and say that alone is what sunk Conoco at Milne Point. It was the whole ball of wax that brought them down.
Another factor, is that it could be said that Conoco should have invested even more millions of dollars into the project on top of the many millions that they had already poured in. But since the Milne Point project had never made a profit, and since Conoco had many other projects throughout the world, they had to be careful of how they divvied up limited monetary resources.
However, BP was willing to pump in several hundred million more dollars into Milne Point after they took it over in January of 1994. This big investment enabled them to increase the oil production rate.

Milne Point crude oil production rate. Barrels per day (rounded off to nearest thousand)

1985 Conoco	1986	1987	1988	1989	1990	1991	1992	1993	1994 BP	1995	1996
	9,000	6,000	0	2,000	11,000	18,000	20,000	18,000	18,000	21,000	22,000

1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008
48,000	53,000	55,000	53,000	52,000	52,000	51,000	51,000	50,000	41,000

I will add more to this Conoco / Milne Point article soon (after July 21, 2008).

Additional info about Conoco at Milne Point can be found in:
The Alaska Business Monthly, April 1995
Additional info about BP's efforts to boost production at Milne Point can be found in:
Oil & Gas Journal, August 12, 1996

Note - about table above that gives history of oil prices and tariffs beginning in 1977.
My source for the nominal oil prices starting in 1977 is: www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp
The website says that prices are based on historical free market (stripper) prices of Illinois Crude as presented by IOGA.
You'll notice that starting in 1987, I also list Alaska North Slope (ANS) crude oil prices on the West Coast. I got this info from
www.tax.alaska.gov/programs/oil/oilprices/ansyearly.aspx
The Alaska North Slope prices that I had only went as far back as 1987. I hope to find earlier ANS west coast prices in the future. As you can see, the Illinois prices and the ANS prices are similar and trend in a similar fashion, but they are not exactly the same.

Tariff rates
The source for the Trans Alaska Oil Pipeline tariff rates starting in 1977 is: a booklet that I found in the library called Petroleum Sector Report dated October 1989. The data is on page A-13. It was produced by Alaska Department of Commerce and Economic Development. The tariff rates from this source only go from 1977 to 1988.
Starting in 1986, I give some additional tariff rate figures that come from a different source. As you can see those new figures don't quite jive with the other figures in the same year. I need to do more work to clarify this. So don't rely on my table for the most precise figures. My table is the best that I can come up with so far. I will try to improve it in the future. It is best to go to the official sources for the most accurate and complete data.

Written by Randy S. Griffin

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