Providing coverage of Alaska and northern Canada's oil and gas industry
February 2006

Vol. 11, No. 6 Week of February 05, 2006

AVCG set to explore slope

Thompson outlines 3-year exploration strategy; slams TAPS tariff increase

Alan Bailey

Petroleum News

At a Jan. 26 meeting of the Alaska Industry Support Alliance, Ken Thompson, Alaska Venture Capital Group LLC’s managing director, described his company’s three-year plan to explore and develop its five central North Slope leases. Thompson also expressed his views on some of the issues surrounding oil and gas exploration in Alaska — Thompson particularly cited unpredictable tariffs on the trans-Alaska pipeline as an impediment to obtaining investor funding for North Slope exploration for independent companies.

With just under 150,000 acres under lease, Alaska Venture Capital Group LLC is something very rare in Alaska — an Alaska independent on the North Slope, Thompson told the Alliance audience.

“The whole company’s strategy is in Alaska, on the North Slope,” Thompson said. “We have no further investments elsewhere. We don’t plan any investments elsewhere.”

AVCG is a closed 16-member LLC, with 15 members coming from Wichita, Kan, Thompson explained. As a holding company, AVCG owns leases, negotiates business deals and sets business strategy. AVCG subsidiary Brooks Range Petroleum Corp., headed by Chairman, President and CEO John Jay “Bo” Darrah, deals with all of the company’s operations, technical services and administrative services.

Brooks Range Petroleum is in the process of staffing a permanent office in Anchorage. That office should open by mid-February and will eventually handle almost all company activities, Thompson said.

Environment is paramount

Being safe and environmentally responsible is a cornerstone of AVCG’s business strategy, Thompson said.

“No-one should do business in this beautiful state unless you’ve got that as your first strategy,” he said.

The company has also followed a strategy of establishing a management team that achieves a balance between experience in major oil companies and experience in independent companies. And the company plans to apply the best-known practices and technologies in the work that it does, Thompson said, citing the use of 3-D seismic prior to drilling as an example.

And, as part of its overall strategy, the company has been establishing a strategic acreage on the North Slope, in an area that ConocoPhillips predecessor ARCO used to term “the billion-dollar fairway,” a particularly prospective area west and southwest of the Kuparuk River and Milne Point units, Thompson explained, adding that the company does also own some leases in the Slugger area in the eastern part of the slope. In the interests of minimizing development costs the company is staying onshore near the existing oil infrastructure, Thompson said.

“We focus on the light hydrocarbon systems, mainly for margin,” he said. “We’re not into heavy oil as others are.”

That asset strategy has now led to a critical mass of five prospects that can attract investors to a three-year exploration program, he said. Those five prospects are Cronus, Gwydyr Bay, Whiskey Gulch, Ocean Point and Titania. Thompson said the company is now in the funding phase for those prospects, looking for partners to share in the exploration and development costs.

“We have a major firm coming up in two weeks to review all of our acreage,” Thompson said, and another firm is coming up to look at partial funding for some of AVCG’s exploration and development plans.

Cronus this year

This winter Pioneer Natural Resources is drilling the Cronus prospect, southwest of the Kuparuk River unit. ConocoPhillips and AVCG, the original Cronus leaseholders, farmed out to Pioneer, with AVCG retaining a 10 percent working interest in the development of the prospect. Cronus has a 35 percent chance of success; potential reserves in the prospect are uncertain but could be a bit over 100 million barrels, Thompson said.

AVCG is waiting until next winter before drilling its Whiskey Gulch prospect, south of the Kuparuk River unit. That prospect closely resembles the neighboring Antigua prospect that ConocoPhillips and Pioneer are drilling this winter — AVCG wants to see the results of that drilling before drilling at Whiskey Gulch. Both prospects involve Kuparuk sands plays. Whiskey Gulch has a 25 percent chance of success, Thompson said. That probability will increase significantly if there is success at Antigua this winter, he said.

“If Antigua is a dry hole we’ll go back to the drawing board,” he said.

The Gwydyr Bay prospect, about 10 miles northwest of Prudhoe Bay, is another candidate for drilling next year. This is a large prospect with a main play in Kuparuk sands and some deeper horizons of interest, Thompson said. The existence of deeper plays is causing the company to look at acquiring some more seismic this winter and to tie that seismic into neighboring wells, even though the company already has seismic for most of the area. The company will tie its seismic into the Northstar field this year, Thompson said.

Titania near Nanuq

AVCG is becoming particularly excited about its Titania prospect, near Alpine’s Nanuq satellite field. Titania appears to be on trend with the 40 million to 80 million-barrel Nanuq field, Thompson said.

“We’re more excited than when we first bought the acreage,” he said.

However, the company needs to reinterpret the 3-D seismic in the area of the prospect and doesn’t expect to drill until the winter after next.

The Ocean Point prospect, with the neighboring Itkillik River area, lies to the south of most current oil activity. A consulting geologist working for AVCG looked at Ocean Point two or three years ago after becoming intrigued by whether the route of the Colville River indicates the location of some underlying geologic structure, Thompson said. AVCG has 2D seismic across part of the area and sees some anomalies that could indicate a deep-seated structure.

“Next winter, or possibly even this winter, our plans are to run additional 3D seismic,” Thompson said. “… If we could verify that there are deep-seated structures from 3D this could turn into a very good prospect for us.”

What will it take?

After reviewing his company’s activities on the slope, Thompson offered some thoughts on what it would take to increase the amount of oil and gas activity in Alaska, especially from the perspective of independent oil and gas companies. Thompson sees three primary stakeholders in the Alaska oil and gas scene: state and federal government; the major producers; and the independent producers.

From the point of view of government, Thompson particularly commended Alaska’s Murkowski administration for its efforts to encourage the opening of more federal government acreage, such as new areas of NPR-A.

“I think the state’s done a great job of really getting out there and trying to encourage the federal government to continue access to lands onshore and offshore,” Thompson said.

Thompson also likes the look of the administration’s proposed reforms to oil and gas taxation, especially if the replacement to the existing production tax allows expenses to be deducted from taxable income.

“At this point we’re looking at a system where you can subtract your capital cost,” he said. That would encourage companies to invest earnings in new exploration and development. But tax stability is also very important.

“Every oilman who stands up here is going to say he wants tax certainty from the government,” he said.

Thompson also lauded the state’s improvements to the permitting procedures.

“We had exceptional, and the word is ‘exceptional,’ performance by the state agencies on permitting for our Gwydyr Bay well,” Thompson said. “How fast it moved surprised the heck out of us.”

Thompson contrasted this with the time that it took to obtain farm in agreements and seismic data from the major North Slope producers, although he later commented that these procedures are improving.

“What slowed us down (for Gwydyr Bay) was getting final farm in agreements and seismic from the majors,” Thompson said. “It took twice as long to get agreements and seismic from the majors as what it took us to get permits from the state.”

TAPS tariffs

However, from the point of view of the major producers’ impact on the independents, Thompson slammed the recent escalation of tariffs on the trans-Alaska pipeline.

“The state hasn’t sizably increased taxes on the oil and gas industry since 1989,” Thompson said. “The biggest increase we have had that’s been detrimental to our economics has been a 20 percent tax increase by the major producers in increasing TAPS tariffs last year by 20 percent … If the producers and me are asking the state for certainty shouldn’t we have certainty for 20 years on the TAPS tariff?”

Thompson said that uncertainty regarding future TAPS tariffs is a primary reason for not securing exploration and development funding.

“That is a brutal fact in the oil patch in Alaska that affects exploration and production,” he said.

Thompson wants to see some mechanism for smoothing out the tariffs over, say, five to 10 year periods.

Facility sharing

Thompson would also like to see more open facility sharing arrangements on the North Slope, perhaps including standard facility sharing agreements.

“Where there is excess capacity it would be great if we had situations like in the UK or Alberta where, instead of every deal being separate or behind the scenes, you know what’s happening — there’s a methodology for calculating facility tariffs,” he said.

However, he thinks that the independents could achieve more for themselves by working cooperatively. Independents could, for example, achieve economies of scale by constructing their own shared production facilities. There is a need for an Alaska independents’ association, as in other North American oil and gas basins, he thinks.

“In every basin I’ve worked on we’ve had informal meetings of all the independent explorers,” he said. “… I think it’s time that the independent producers (in Alaska) organized.”

Meantime the independents are looking forward to an agreement on a North Slope gas line.

“That’s a key thing both for the producers and the state,” he said. “If you can allow for a second revenue stream of natural gas sales … you can drill for smaller and smaller oil plays.”

But, all in all, Thompson feels encouraged about the number of new companies that have entered the Alaska oil scene in recent years.

“The state is doing something right,” he said.

He said that when he first came to Alaska in 1994 there were nine leaseholders on the North Slope. Now there are 25 leaseholders. In that same period the number of leaseholder in the state as a whole has increased from 24 to 99.

“We’re excited that new entrants are coming to the North Slope,” he said.

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