How to Share Infrastructure on the North Slope

TAPS’ status as a common carrier pipeline has been a critical component of North Slope development. Even with this 800-mile solution in place, development costs in Alaska’s Arctic are higher than most other places, and one can only imagine how the industry may have withered to nothing if every newcomer needed to negotiate with pipeline owners to use TAPS. In addition to stranded North Slope natural gas, Alaska would also have stranded pools of North Slope oil.

Beyond TAPS, there are many other common carrier pipelines that support North Slope operations, and Australia-based Santos is leveraging some of that existing infrastructure to develop its Pikka project northwest of Prudhoe Bay.

“One of the highlights of 2022 for Santos was taking a final investment decision for the Pikka project last August,” Santos Managing Director and CEO Kevin Gallagher stated at the 2023 Annual General Meeting in April. “Pikka will have a small surface footprint, utilising existing infrastructure, including the Kuparuk transportation pipeline and the trans-Alaska pipeline… Pikka represents compelling value for Santos shareholders given its robust economics and strong local stakeholder support.”

The Kuparuk pipeline is one of several that feeds TAPS and currently transports oil produced by owner ConocoPhillips Alaska, Eni, and Hilcorp.

Santos plans to join that group. Construction has begun at the Pikka project, which will include a single drill site, an oil processing facility, and other infrastructure to support producing 80,000 barrels of oil per day.

In addition to the infrastructure Santos plans to construct itself, it plans to utilize an existing road system that is currently owned by the Kuparuk River Unit (KRU) lessees (ConocoPhillips Alaska, Chevron, and ExxonMobil) and operated by ConocoPhillips Alaska. Unlike the Kuparuk pipeline and TAPS—common carrier pipelines overseen by the Regulatory Commission of Alaska—how to share the road system is a point of contention.

Rocky Road

Santos built ties with Alaska in late 2021 by acquiring Oil Search, which itself entered the state via an $850 million investment a few years earlier in 2019 when it acquired Armstrong Energy’s interest in the Pikka Unit, among other North Slope interests.

The Pikka project is located west of the KRU, and during pre-development of the Pikka project ConocoPhillips Alaska did not object to Santos accessing the KRU road system. ConocoPhillips Alaska and Santos signed an ad hoc road use agreement that allowed Santos to use the KRU road system at no cost during pre-development.

As planning for Pikka progressed, the two companies began to disagree on Santos’ use of the KRU road system. Santos proposed to compensate ConocoPhillips Alaska approximately $60 million for operations and maintenance and future capital expenses in May 2021, according to the Miscellaneous Land Use Permit (MLUP) that Santos filed in February 2022. ConocoPhillips Alaska asserts that Santos’ offer was actually for much less than $60 million and that its own proposal to Santos was substantially equivalent to the road use fees that Santos previously proposed for long-term use of its own Pikka Unit roads.

In its MLUP application letter, Santos asserts: “Rather than provide feedback on the agreement proposed by OSA [Santos], CPAI [ConocoPhillips Alaska] proposed its own road use agreement on July 23, 2021. On its face CPAI’s proposal attempts to extract exorbitant value from OSA, but it also so severely burdens Pikka project economics to favor processing at CPAI facilities.” Santos also asserts in the letter that “State oil and gas leases do not entitle the holder to exclusive use of associated surface lands… Assessing an access fee for access and use of gravel roads on state lands does not promote exploration or development.”

The Alaska Department of Natural Resources (DNR) issued Santos a permit to use the road system, a decision that ConocoPhillips Alaska appealed to Acting DNR Commissioner Akis Gialopsos, who rejected the company’s request for a hearing. According to his decision, issued in December 2022, “At its very core, the Permit authorizes ‘access to OSA’s easements within the KRU, PKU [Pikka Unit] development projects, and other lands to which OSA holds a mineral interest until a commercial road use agreement is executed between OSA and CPAI to provide for reasonable concurrent use.’” (Gialopsos added the emphasis.)

He continued later in the decision to say, “Oil and gas leases incentivize and promote the development of the State’s resources by granting the exclusive right to the leasing party to the State’s subsurface oil and gas resources. These exclusive subsurface rights are accompanied by limited, non-exclusive surface rights for the purpose of facilitating development within the leased tract.”

ConocoPhillips Alaska exercised its right for the Anchorage Superior Court to review Gialopsos’ decision on December 30, 2022. The company states in its filing, “The commissioner erred in failing to conclude that OSA should be estopped from obtaining the permit. Under the Ad Hoc Agreement between the KRU Lessees and OSA, OSA acknowledged that the KRU roads were owned by the KRU Lessees, and that the KRU Lessees have a right to exclude OSA from use at any time. OSA also has acknowledged that roads are private property that require compensation for use. OSA attempted to sell its 11-mile Pikka Unit road to the Alaska Industrial Development and Export Authority [AIDEA] for $200 million, after which OSA proposed that AIDEA would charge OSA tolls for their use at a minimum $1.4 million per road-mile per year, the same per-mile annual amount that the KRU Lessees proposed for OSA’s use of the KRU roads.”

In the filing, ConocoPhillips Alaska also asserts: “The Commissioner erred in concluding that CPAI does not have a private property right in the KRU roads while disregarding that: 1) the KRU Lessees built the KRU roads with gravel purchased from the State at considerable cost; 2) the KRU Lessees pay $10 million to $20 million to maintain the KRU roads; 3) building such roads today would cost in excess of $1 billion; 4) the KRU Lessees pay annual property taxes on KRU property, which includes the KRU roads; 5) the KRU Lessees remain responsible to remediate and potentially remove the KRU roads when the leases expire; and 6) the State assumes no responsibility for maintenance or liability associated with improvements constructed on state land, meaning the responsibility falls exclusively to the KRU Lessees.”

The Road Ahead

It’s important to note that, while TAPS and the Kuparuk road case both involve North Slope infrastructure, they are not directly comparable to each other. TAPS was developed in concert with multiple parties opting in for a shared benefit. The KRU road system was developed primarily to facilitate one unit’s activities, without any formal agreements in place for other parties or units to take advantage of it.

As of publication the dispute remains unresolved under the leadership of a new DNR commissioner. In May, the legislature confirmed the appointment of John Boyle to lead the department. Boyle previously worked as a chief advisor to the North Slope Borough mayor, and he was director of government affairs for BP and later, as it happens, Oil Search.

There are clearly benefits for sharing on the Slope—and arguments for protecting private investment. The uncertain status of the KRU road system is, almost literally, a bump in the road, but whatever resolution may come, it will provide greater clarity for North Slope operations moving forward.