Exploration begins with lease sales, fieldwork, seismic surveys and wells and, ideally, ends in development. Caelus Energy Alaska LLC is currently working on two ventures at the opposite ends of that spectrum. Earlier this year, the company officially sanctioned a development at the Nuna satellite of its Oooguruk unit. At the same time, the company has been quietly preparing to explore acreage it recently acquired through lease sales.
The former is a project at the threshold between exploration and development. The latter is more of an opportunity than an exploration venture with publicly defined details.
The former is a project Caelus inherited when it acquired the Alaska assets of Pioneer Natural Resources Inc. in 2014. The latter is an opportunity the company deliberately pursued by submitting some $15 million in high bids on some 322,795 fairly contiguous acres in the North Slope and Beaufort Sea areawide lease sales in November 2014.
The Dallas-based Caelus Energy LLC is a relatively young company created by principals with a history of guiding two independents through short-term projects.
Jim Musselman and various colleagues acquired a struggling independent called Triton Energy in the 1990s and sold it to Amerada Hess in 2001 for $3.2 billion on the strength of several projects, particularly a quick effort to bring a West Africa discovery online.
Next, Musselman and his team founded the independent Kosmos Energy, which made a discovery in offshore Ghana that propelled the company to a public offering in 2011.
In both cases, Caelus executives highlight similar accomplishments: quickly raising large sums of money on the private market, making exceptionally quick turnarounds from discovery to development in difficult operating environments and producing large profits for investors by eventually taking a company public or selling it to a larger company.
In 2011, instead of staying with Kosmos after taking the company public, Musselman formed another privately held independent called Caelus Energy. The company made its first big move in October 2013 when it struck a deal with Pioneer Natural Resources, which decided to sell its Alaska assets to free up capital for its operations in West Texas.
Showing his willingness to tackle Alaska, Musselman said, “If you’re not nervous and a little bit worried or a bit scared of doing business in hostile places, you’re done.”
The parties originally agreed to make the sale for $550 million and dropped the price to some $300 million in March 2014, clearing the way for the deal to close in April 2014.
Through its first year in Alaska, Caelus started the process Musselman has undertaken twice before. When Caelus announced the acquisition in October 2013, Musselman said his company would spend at least $300 million developing the Oooguruk unit, specifically its Nuna satellite, which Pioneer had spent considerable money appraising.
But, Musselman added, the company hoped to raise more than $1 billion for future development work and saw the potential to spend as much as $1.5 billion in Alaska over a five-to-six-year period. When it closed on the sale in April 2014, Caelus also formed a strategic partnership with the international investment company Apollo Global Management, which provides short-term funds and an avenue for future borrowing.
“We feel very comfortable that we can do several billion dollars-worth of development and have the requisite equity and debt financing necessary to go forward with some good-sized developments on the North Slope,” Musselman told Petroleum News at the time.
Royalty relief
When Caelus announced its arrival in Alaska, in October 2013, Musselman said the company would begin work on developing the Nuna satellite “pretty much immediately.”
And after the company finally closed on the acquisition, Musselman said the company was aiming to bring the field into production by mid-2016. “We’ve got the funds committed and we’re moving forward as quickly as we can,” Musselman said, estimating some $550 million on new facilities and $800 million to $900 million for drilling wells.
By the time Caelus submitted its latest plan of development for Oooguruk in June 2014, though, the company told state officials it was still determining the economics of Nuna.
Through a previous appraisal program, Pioneer Natural Resources had estimated that the Torok formation reservoir contained between 75 million and 100 million barrels of oil.
The reservoir, though, is too far south to be developed economically from the existing Oooguruk Island, which means Caelus would need to construct new onshore facilities near Oliktok Point. “There’s a tremendous amount of oil in place,” Caelus Senior Vice President for Alaska Operations Pat Foley told an industry audience in November 2014. “And the question on Torok is: What is the recoverable portion going to be?”
In July 2014, Caelus asked the state to modify the royalty structure at Nuna, saying it would be unable to proceed with development without help. The company requested a flat 5 percent royalty rate on 11 leases associated with the satellite until the project reached payout - meaning revenues covered upfront costs. At that point, rates would increase by 1.875 percent annually, for four years, and then returned to original levels.
Instead, the state offered a 5 percent royalty rate on five Nuna leases if Caelus met various sanctioning, spending and development targets through early 2017. The preliminary decision came as Gov. Sean Parnell lost a re-election bid, which prompted Rep. Les Gara to ask the state to give the final decision to incoming Gov. Bill Walker.
In late January, the state approved the royalty reduction. The ruling required Caelus to sanction the project by the end of March 2015, begin spending money by the end of September 2015, spend at least $260 million and bring the field into sustained production by the end of September 2017. The final decision also retained early requirements for Caelus to provide public reports to extend knowledge about developing similar geology.
In a March 2015 letter to Alaska Department of Natural Resources Deputy Commissioner Marty Rutherford, Foley wrote that the Caelus Energy Alaska board of directors had, in September 2014, sanctioned the project and committed $76 million of its 2014 capital budget to it, subject to the approval of its pending request for royalty modification. With the favorable January 2015 ruling, the company had “fully sanctioned” the Nuna project.
As such, Caelus began initial construction activities earlier this year. The work primarily consisted of gravel mining for an access road, drill site and pad expansion. The company told state officials it has already “prepared and executed” 16 authorizations for expenditure totaling more than $480 million and intended to prepare another 31 authorizations for well activities, totaling, in aggregate, more than $800 million.
Exploration prospects
While much of its first year in Alaska was publicly focused on Nuna, Caelus was also eyeing potential exploration opportunities on the other side of the North Slope.
“I don’t have anything I can tell you specifically about where our first exploration well will be,” Musselman told Petroleum News in April 2014, when the company closed on its purchase. “I would like to think that we would drill two to three exploration wells per year, starting hopefully this coming winter. … That’s one of the main reasons we’re in Alaska. We do want to explore. We think there are tremendous opportunities remaining.”
In November 2014, through a month-old subsidiary called Caelus Alaska Exploration Co., the company acquired 322,795 state-owned acres, comprising more than half of the acreage receiving bids in the North Slope and the Beaufort Sea areawide lease sales. The total acquisition included 263,674 acres from the North Slope sale and 59,120 acres from the Beaufort Sea sale. Prior to the sales, Caelus held some 40,373 acres of state leases.
The leases mostly stretch across a somewhat contiguous area running from south of the Prudhoe Bay unit to south of the Point Thomson unit, mostly east of the Dalton Highway.
The large block includes several former prospects.
The region south of the Prudhoe Bay unit includes the Toolik No. 1 well, which was a dry hole ARCO drilled in the 1960s to determine how far south the Prudhoe Bay field extended. Some 10 miles to the east is the Jacob’s Ladder C well and Jacob’s Ladder C-A sidetrack, which Anadarko Petroleum Corp. drilled in 2007 and 2008 to evaluate Karst topography. The wells found “no commercial hydrocarbons,” according to Anadarko.
About a mile northeast of the Jacob’s Ladder wells is the Lake 79 No. 1 well, a Shell operation from early 1968 that also unsuccessfully tried to piggyback on Prudhoe.
The results of those wells might lead one to wonder what Caelus saw in the region south of Prudhoe Bay. The answer perhaps lies much deeper than those early efforts thought to explore - in the stacked geology thought to contain the source rocks for Prudhoe Bay.
The remaining acreage Caelus acquired in the sales is set back slightly from the coast line south of the Duck Island unit, the Liberty unit, the Badami unit and the Point Thomson unit.
There has been relatively little previous exploration in the region, although the eastern North Slope has always attracted ambitious companies, particularly independents. The pending development of the Point Thomson unit and the recently stability of the Badami unit operation could make the eastern North Slope more economic for marginal fields.
“One thing you’ll find about Caelus: We’re not going to let the grass grow under our feet,” Foley said at the Resource Development Council’s annual meeting on Nov. 18, the day before the lease sales. “Pace is everything. We’re not going to be careless, but we’re going to go as fast as we can.”
Using nearly $1 billion in available funding from Apollo, Caelus planned a $500 million capital for Alaska this year. The majority of that funding is going toward expanding the existing facilities serving the Oooguruk unit and developing new facilities for Nuna.
But Caelus also earmarked some money for exploration. The company commissioned two 3-D seismic programs, including one targeting the acreage grabbed at the lease sales.
Caelus is keeping an eye out for potential partnerships, Foley said at the meeting.
