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UltraStar preparing to drill Dewline Despite weak credit market and lower oil prices, tiny UltraStar is set for drilling on the North Slope after four years of trying Eric Lidji Petroleum News
The prevailing wisdom right now says only the biggest ships can ride the biggest waves, but tiny independent UltraStar Exploration LLC is preparing to drill an exploration well this winter on the North Slope in the face of economic uncertainties and falling oil prices.
Before the end of March, UltraStar expects to spud the Dewline No. 1 exploration well north of the Prudhoe Bay unit near Point Storkerson using the Akita-Doyon Arctic Wolf rig, Jim Weeks, managing member of UltraStar, told Petroleum News on Feb. 27.
A major reason the project is able to move ahead in the current economic climate is funding. UltraStar is backed by a group of about a dozen private investors, Weeks said.
“We’ve got individuals putting their personal money into the risk capital. There’s no way you would get a bank to finance a risky well,” Weeks said, adding, “It’s easy to get money once you find oil.”
Dewline No. 1 is permitted to 9,900 feet, deep enough to target a prospect in the Ivishak formation and “secondary targets” in the shallower Sag River and Kuparuk formations.
UltraStar recently submitted an application to the state to form the Dewline unit, which would include three leases UltraStar owns in the area, covering some 3,250 acres.
Under the proposed terms of the unit, the company would drill the Dewline No. 1 well by June 30, 2011, and a second well, North Dewline No. 1, by June 30, 2013. If the wells are successful, the proposal calls for filing an initial plan of development by Oct. 1, 2013.
Weeks said the proposed unit could contain additional prospects worth drilling.
“There are pleasant surprises in this business. You never know until you drill,” he said.
Drilling permit issued UltraStar is about to do just that at Dewline No. 1. Weeks said the company is fully permitted, including a drilling permit from the Alaska Oil and Gas Conservation Commission issued on Feb. 18. The drilling pad is complete, as is a two-mile ice road.
As of Feb. 27, Arctic Wolf was en route to the site, where it should take six days to erect.
Weeks said he expects crews will need 23 days to drill the well.
If Dewline No. 1 finds commercial quantities of oil, UltraStar plans to build a gravel road tying back to an existing road running from Point McIntyre down to Deadhorse, allowing the company to drill year round and possibly contract for cheaper rates on a drilling rig.
UltraStar also plans to eventually use a three-phase pipeline carrying oil, gas and water from Point McIntyre to the Lisburne production facilities in the Prudhoe Bay unit.
Weeks said UltraStar would most likely use multiphase metering technology, which measures the three-phase production stream without separating the mixture into its separate parts of oil, gas and water. Pioneer is currently testing the technology at the Oooguruk unit, which feeds into existing facilities at the Kuparuk River unit.
If the technology is successful and approved by regulators, it is expected to reduce the cost and complexity of gaining access to existing North Slope processing facilities.
With a large enough oil discovery, UltraStar might even be able to justify the cost of building new processing facilities at Dewline and connecting into the Northstar pipeline to the west that ships pipeline quality oil to Pump Station 1 on the trans-Alaska oil pipeline.
Trouble getting drilling rig UltraStar began working on Dewline four years ago based on 3-D seismic acquired after sister company Winstar Petroleum drilled a dry well near Oliktok Point in 2003.
Dewline got its name because the area used to be a Distant Early Warning Line site, part of a broad system of radars set in the North American Arctic to detect Soviet attacks.
UltraStar originally planned to drill a directional well to hit Dewline Deep from the existing gravel pad at Point McIntyre, but failed to get access issues worked out.
The company next looked to drill along a road to Point McIntyre, looking to be as close as possible to the three-phase pipeline heading down to the Lisburne facilities.
But UltraStar had trouble getting a rig lined up. Because drilling rigs must be specially outfitted to operate in the harsh winter drilling season in Alaska, the rig market in northern Alaska can remain tight even when rig markets nationally start to loosen.
“Rigs are still in short supply on the North Slope,” Weeks said.
Then, last year, UltraStar learned the Arctic Wolf rig might be available. The rig is under contract to FEX, the local subsidiary of Canadian independent Talisman Energy. FEX previously used the rig for a multiyear frontier exploration program in the National Petroleum Reserve-Alaska in 2006, but recently decided not to drill in 2009 or 2010.
Dewline alone didn’t justify a contract, so UltraStar partnered with Rampart Energy Co., the Denver independent planning to drill an exploration well in Nenana this summer.
The Arctic Wolf is a light-weight rig capable of drilling to a total depth of some 10,000 feet, about two-thirds the depth of the directional well UltraStar originally hoped to drill.
So UltraStar decided to drill Dewline vertically, reducing both the depth and the cost of the well, but requiring an ice pad and a two-mile ice road to connect back to the existing gravel road to Point McIntyre, essentially keeping the total cost of the project even.
Drilling vertically offers other benefits, such as reducing the risk of the well, Week said.
Above the Sag River formation sits a layer of shale known as the Kingak. Weeks said the Kingak would “slough and swell” in the presence of the freshwater drilling mud the company plans to use. A vertical well passes through less of the shale for less time.
Applying for ACES credits Dewline No. 1 is a change of pace for Weeks, a former ARCO executive.
“It’s been a real learning experience,” he said, about trying to drill on the North Slope as a small independent, adding, “I used to just snap my fingers: Let’s go drill over here.”
UltraStar received tax credits under Alaska’s Clear and Equitable Share, or ACES, for work completed in 2007 and recently applied for credits for work completed in 2008.
Echoing statements from state Department of Revenue officials, Weeks said he is still learning how the new tax system and the accompanying tax credits actually work.
“Everybody’s learning the system. ACES is a very complicated piece of legislation,” he said, adding, “I think on both sides, people are just trying to figure it out.”
Asked about the different changes over the past five years, as he went from drilling a well under Winstar to preparing to drill under UltraStar, Weeks said he would like to see longer lease terms, which are down to five years from seven and previously 10 years.
“Five years is too short. I’ve been grinding on this for four,” he said.
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