Providing coverage of Alaska and northern Canada's oil and gas industry
April 2012

Vol. 17, No. 15 Week of April 08, 2012

‘Bigger than us’

With proved 40M barrel discovery at Mustang, Brooks Range looks for capital

Kay Cashman

Petroleum News

Brooks Range Petroleum Corp. has proved up a 40 million barrel discovery on Alaska’s North Slope; that’s 40 million barrels of recoverable oil, which can be expected to produce for 15 years, yielding 13,500 barrels of oil per day at its peak.

The Mustang prospect, formerly known as North Tarn, in the new Southern Miluveach unit on the southwestern boundary of the Kuparuk River unit, held more recoverable oil than Brooks Range expected — in the Kuparuk sands, which had been the company’s secondary target.

“The Kuparuk is good quality sands with excellent pressure and oil flow capability,” Alaska Venture Capital Group LLC’s lead managing member, Ken Thompson, told Petroleum News April 3.

Mustang, its recoverable reserves established with four penetrations, plus three other smaller developments and numerous exploration upside anomalies on 230,000 acres of leases, is “bigger than us … bigger than both of us,” Thompson said, referring to the two companies that control the acreage in the unit — operator Brooks Range Petroleum’s parent AVCG and Nabors Industries’ Ramshorn Investments.

“We’ve had much more success than our owners can afford … more than we imagined. … Simply put Mustang along with our other development opportunities and exploration upside across the North Slope is much bigger than we are, so we are looking for a large partner, or partners, to share capital needs,” he said.

AVCG and its partners have spent “about 200 million dollars on exploration in the last 10 years, $40-60 million of that in the last couple of years, and we will now increase spending substantially to develop Mustang, confirm our other development areas and continue to explore,” he said.

It’s going to take “a few hundred million dollars to develop Mustang,” he said; a project that operator Brooks Range would like to see in production in early 2014 from seven horizontal producer wells and eight horizontal injectors, utilizing a standalone modular facility and a pipeline connecting to the Alpine pipeline which crosses near the wells.

“This year we went back in and deepened a well we started last year and got a confirming flow test. Then the second well, Mustang 1, came in with thicker sand and we didn’t need to drill another well, as planned. We decided to save our capital for development,” Thompson said.

Mustang just part of the story

The other fields AVCG and Ramshorn have in their joint, Brooks Range-operated, North Slope portfolio include “another 100 million barrels in reserves and resources in three other development areas that we have pieced together in the last several years,” Thompson said, as well as “numerous strat traps that are in the 10-50 million barrel range which add up to a valuable ‘string of pearls’.”

The anchor field will be Mustang, which could be larger than 40 million barrels of recoverable oil, as Thompson said there may be a Kuparuk formation extension to the northwest that would add additional reserves and field life, in an area the company calls Appaloosa, where Brooks Range will drill extension exploratory wells in the future.

Plus, there is the Brookian: “When we drilled North Tarn No. 1, we did encounter Brookian sands with oil shows but they were lower permeability than anticipated. Later in field development, we plan to test their commerciality with a long horizontal well and frac jobs ... or recomplete depleted Kuparuk producers into the Brookian sands with horizontals,” he said.

Three other development areas, 100 million barrels

The other three development areas that Thompson said hold about 100 million barrels in recoverable reserves and resources “need some delineation drilling before construction of production facilities. …”

“Four years ago Brooks Range had good results from an Ivishak oil flow test at Beechey Point,” the unit north of the Prudhoe Bay field, in the Gwydyr Bay region. And we know of other accumulations in what we call the East Bank development area of our Beechey Point unit.

“We also found Kuparuk sands right next to ConocoPhillips’ Nanuq field in our Tofkat well, and we mapped seismic anomalies in the Brookian and Jurassic sands,” Thompson said.

“Then we acquired leases just east and adjacent to the Badami unit, between it and Point Thomson, called our Telemark development. An oil well drilled in 1970 by one of the majors tested 750 barrels of oil a day in the Flaxman sandstones,” he said.

The nine-lease Telemark prospect, which Brooks Range is in the process of unitizing, wasn’t commercial at $18 oil, Thompson said, but today, with horizontal wells and higher oil prices, it’s a different story.

Up to 1 billion barrels, may be 30-40% producible

As for the smaller traps, as former president of ARCO Alaska, which pioneered 3-D seismic west of the Kuparuk River field, Thompson saw a lot of the 10-50 million barrel traps on seismic a decade or more ago, what he calls a “string of pearls.” And more recently with Brooks Range.

“Our joint venture, just in the last two years, has finally been able to analyze all the proprietary 3-D we have run. When we map our stratigraphic anomalies we see up to 1 billion barrels of oil recoverable … so with geologic chance factors, maybe 30-40 percent of that is producible. …

“Bottom line, we have a great portfolio of map-able exploration projects for the next three years, and beyond,” Thompson said.

Using Tudor, Pickering, Holt & Co.

Which is why Thompson, the man in charge of raising money for operator Brooks Range, brought in a Houston-based integrated energy investment and advisory firm to help assist in evaluating strategic options for AVCG and Nabors joint portfolio of Alaska North Slope leases.

“We have hired Tudor, Pickering, Holt & Co., the firm that pieced together the Armstrong/Repsol deal, to work on behalf of AVCG and Nabors,” Thompson said, with AVCG taking the lead and Nabors-owned Ramshorn also joining the process. Ramshorn and AVCG recently bought out TG World Energy, the third partner in the Brooks Range-operated leases.

“We’re looking for a partner that can come in and take a large portion of our working interest in return for funding. We want to move ahead this fall with the Mustang development. And next winter move on delineation of the other three development areas and continue a good level of exploration particularly on our western anomalies,” Thompson said.

They are open to an acquisition of the full or partial ownership of the assets or an equity investment into the holding company, AVCG, he said.

But Brooks Range’s preference is for a cash-based bonus component up front with a commitment to fund the forward program.

Alaska-grown oil company might go public

Tudor, Pickering is pursuing two funding strategies.

“We recently shared all of our data with five world-class private equity firms — in the energy industry they are the top five you’d want to have involved,” Thompson said.

“In strategy 1 they would invest all the capital for development and exploration until we get to first quarter 2014 when Mustang starts production. Once that happens we’ll have enough operating cash flow from oil production to fund everything else,” he said.

Then, “two or three years after that we’d go public, do an initial public offering, a stock market launch,” he said.

An IPO can be used to raise expansion capital and become a publicly traded enterprise.

“This interests us — and is viewed as innovative and distinct to some of the equity firms we’re talking to — because it would create an Alaska-grown, publicly traded, independent producer. It would be a first for the state,” Thompson said.

“But cash from private equity firms can be expensive, dependent on the share of the company they demand for the capital, so pursuing a second strategy makes business sense,” he said.

Strategy 2 is to find a producer, or two, in Alaska or elsewhere in the world, who is willing to put up the funds in return for a majority share of the working interests.

“We would like to continue to operate but some company might want to operate; we’re open to that discussion. And at the right indicative offer, we would enter into an exclusive arrangement with just one company to own part of or all the assets” Thompson said.

Of the three producers that have requested more detailed data or visited the data room Tudor, Pickering set up two months ago in Houston, and the five oil companies that recently requested to see Brooks Range’s drilling results from this winter’s drilling, most seem to want Brooks Range to operate.

“We’ve shared everything” with prospective partners, Thompson said, “from seismic, to lease and financial information, to logs from drilling. We’ve even run sophisticated reservoir simulations for Mustang and Tofkat development.”

Because of confidentiality agreements with the eight prospective producer partners, Thompson could not name them but, he said, they include “producing companies from all over the world; most have never been to the North Slope, but they are interested in Alaska, and some are there already.”

Besides being able to handle the funding of the Mustang development, “we’re looking for a partner whose culture fits our culture and is great to work with. Again, however, for the right price, we would divest all assets and turn over operations if required,” he said.

What about ACES?

What about Alaska’s production tax, Alaska’s Clear and Equitable Share, the production tax enacted in 2007, better known by its acronym, ACES? Are prospective producers paying attention to the debate in Juneau?

“Yes,” Thompson said, “they are watching. Some are even tapping into the Legislature’s website, watching committee hearings on the tax bills.”

“In the last two months, in dealing with planning groups and senior executives in these companies, they have all asked, ‘what is Alaska going to do on the tax regime?’ I have been honest with them; I tell them that I don’t think it will get worse, that there will probably be a modest improvement,” he said.

“Some of these companies are going to wait on the adjournment of the legislative session. It will effect what they are going to do.”

“This deal, finding a funding partner, or partners, can be a big step in helping level out North Slope production, so that more companies get interested in Alaska,” Thompson said.

Shale player’s main interest tight oil

One company that is looking at operator Brooks Range and all the leases it operates for the joint venture between AVCG and Nabors has told Thompson that “they find our conventional plays interesting but their main interest is our acreage that also has potential for unconventional source rock plays, the Shublik and other shales.”

“We own a little over 230,000 acres on the North Slope; 100,000 acres of that is out west, between Kuparuk and Alpine, right in the fairway with the right maturity for oil in the source rock shales. One company is evaluating that acreage for unconventional oil. They say our conventional plays lower their risk in the shales,” he said.

So what does Thompson, a petroleum engineer turned top executive for ARCO, turned independent player, think of his last few years, and future, with AVCG and Brooks Range?

“I have had so much fun; this last winter, especially. It’s like the old days for me. … The last time I was this excited was in 1994-95, when I first came to Alaska, and the well-site geologist faxed to my home the discovery confirmation well logs for the Alpine field,” he said.

Editor’s note: Part two will feature the history of Alaska Venture Capital Group, or AVCG, which officially got its start in 1999; the formation of Brooks Range Petroleum Corp. as an Alaska-based operating company; and more information on the joint venture’s 100,000-acre leasehold that has good potential for tight oil production from northern Alaska’s source rocks, which are primarily shale. It will also have more information about Brooks Range’s team and Ken Thompson’s vision for the state of Alaska and the infrastructure needed for unconventional oil production, such as roads, which he refers to as, “Build it, and they will come.”

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