The Explorers 2016: Caelus taking a risk on Smith Bay
Company slows Nuna development but takes a chance on remote exploration
For Petroleum News
Caelus Energy LLC offers a reason for concern and a reason for hope.
A local subsidiary of the Texas-based independent is slowing its development of the Nuna satellite at its Oooguruk unit because persistently low oil prices and the resulting political uncertainty have challenged the economics of that North Slope project.
At the same time, the company proceeded with a two-well exploration program in an even more remote and challenging region of Smith Bay farther west - a region that could only be developed economically if oil prices rise considerably over the near future.
Caelus is the descendent of a string of small independent exploration and production companies led by President and Chief Executive Officer Jim Musselman. In the 1990s, Musselman and his colleagues led a struggling independent called Triton Energy to discoveries in Colombia, Southeast Asia and offshore West Africa before selling to Amerada Hess. After the sale, Musselman and his investors founded Kosmos Energy, which used a discovery offshore Ghana to justify an initial public offering in 2011.
Through a new company called Caelus, the team acquired the assets of Pioneer Natural Resources Alaska Inc. for $300 million in early 2014, after months of negotiations.
The acquisition made Caelus the operator of the Oooguruk unit. The company was eager to develop the associated 75 million to 100 million barrel Nuna satellite but later asked the state to improve the economics of the project by changing the royalty structure.
The state reduced the rate on five leases to 5 percent until Caelus recovered costs, and the company officially sanctioned the project in March 2015. Later in the year, Caelus postponed installation and fabrication planned for this winter. “All of our facilities are designed,” Caelus Senior Vice President of Alaska Operations Pat Foley said in late 2015. “Our plan right now is to come back next winter and install the flow lines and get going full speed on facilities fabrication and still try and make our late 2017 oil start.”
Smith BayAt the same event, though, Foley praised the Smith Bay project.
“It’s a very exciting exploration play. Every person that I’ve seen exposed to this project, their eyes, they just light up. These are two wells that just need to get drilled,” he said.
Caelus acquired a 75 percent working interest in the 26 leases of the Tulimaniq prospect in Smith Bay from the independent NordAq Energy Inc. in June 2015. The company created a new subsidiary to manage the venture: Caelus Energy Alaska Smith Bay LLC.
The prospect is roughly 150 miles from Kuparuk River unit Drill Site 2P and some 70 miles from Barrow, making it the most remote exploration project this winter. By the end of 2015, Caelus had already brought the Doyon Arctic Fox rig and 35 barges of material to Cape Lonely, to the east of Smith Bay, in preparation for the start of the season.
The acquisition allowed Caelus to piggyback on permitting activities NordAq had underway for the first well and jump quickly to permitting activities for the second well.
By late February 2016, Caelus had completed the first well in the program and was in the process of drilling the second, according to testimony that Division of Oil and Gas Director Corri Feige presented before the Alaska House Resources Committee. By the time The Explorers went to print, Caelus had yet to publicly release any results.
Both the Caelus venture and the earlier NordAq venture are building upon a previous seismic campaign conducted by the Talisman Energy subsidiary FEX in the 2000s.
Using those references, Caelus is seeking oil in turbidites, which consist of sandstone layers and channels created by submarine sand flows in ancient marine basins. The target intervals are in the Brookian, which is the youngest and shallowest on the North Slope.
Even with this history of prior work, Caelus plans to conduct a tight program and release few results. “Success will be if you see us back out there the next year,” Foley said.
Any discovery in Smith Bay would need to be large to justify the cost of developing the remote region. The company has described the project as a 1 billion barrel opportunity.
Prior to the Smith Bay acquisition, Caelus was compiling a 350,000-acre position at the eastern end of the central North Slope, between the Prudhoe Bay and Badami units.
The company recently commissioned a 3-D seismic survey in the region.
“It’s phenomenal data. We’re really excited,” Foley said.