Brooks Range Petroleum Corp. is planning activities on its North Slope acreage this winter unlike any it has undertaken in its nearly 14 years in Alaska: development.
After more than a decade acquiring prospects, drilling exploration wells and shooting seismic, the operating arm of the Kansas-based independent Alaska Venture Capital Group LLC is now working to bring its Mustang project into production by 2014.
Brooks Range Petroleum is also deciding how much exploration it can maintain this winter and is planning between three and five penetrations across three North Slope units.
The work at Mustang follows two exploration seasons at the prospect in the Southern Miluveach unit — southwest of the Kuparuk River unit — and a third party audit.
According to the global consulting firm DeGolyer and MacNaughton, the Mustang prospect contains proved (P1) gross reserves of 24.7 million barrels of recoverable oil.
The firm also estimated the field contained 43.6 million barrels of proved and probable (P2) reserves and 51 million barrels of proved, probable and possible (P3) reserves.
“These estimates confirm commerciality and a favorable rate-of-return to proceed with development,” AVCG lead member Ken Thompson told Petroleum News in August.
Brooks Range Petroleum plans to complete engineering on its standalone facilities this year, lay gravel this coming winter and start building the modular facilities in 2013. The company expects production will begin in the first half of 2014 and peak at 14,000 barrels per day in 2016. Brooks Range Petroleum is estimating a 20-year field life.
Currently, Brooks Range Petroleum is exploring and developing the region through a joint venture with the Nabors Industries subsidiary Ramshorn Investments Inc.
Gathering momentumWith Mustang online, Brooks Range Petroleum would become the first small and privately held independent to take a North Slope prospect from exploration to production.
It would be a long time coming.
When long-time oilmen John Jay “Bo” Darrah Jr. and Barton Armfield formed Alaska Venture Capital Group in 1999, they intended to go after North Slope oil fields too small to interest the majors, but large enough to be profitable if developed correctly.
AVCG acquired several exploration properties across the North Slope, but struggled for years to find partners and to negotiate access agreements with the facility operators.
Then, in 2004, AVCG formed Brooks Range Petroleum Corp. and over the course of 2006 this subsidiary became the operator of a four-company joint venture alongside the Calgary-based independents TG World Energy Corp. and Bow Valley Energy Ltd. and the Nabors subsidiary Ramshorn Investments Inc. (The British independent Dana Petroleum eventually bought Bow Valley and ultimately sold its Alaska assets back to the joint venture. TG World remained a partner for many years, but eventually sold its assets back to the joint venture after being acquired by a Canadian junior mining company.)
An active drilling programToday, Brooks Range Petroleum is among the most active companies in Alaska.
The company holds 119,900 gross acres in three regions across the North Slope. It operates four units with a fifth proposed. Since 2007, it has drilled 11 penetrations across its prospects. And during that time it has also shot 330 square miles of 3-D seismic across its acreage, and acquired another 240 square miles of 3-D seismic from other companies.
In early 2007, Brooks Range Petroleum spud North Shore No. 1 and Sak River No. 1, both in the Gwydyr Bay region. While Sak River No. 1 turned out to be a dry hole, North Shore No. 1 found “approximately 70 feet of oil-charged Ivishak sandstone formation.”
Brooks Range Petroleum re-entered North Shore No. 1 in early 2008 to test the Ivishak and the shallower Sag River formations. The Ivishak flowed at 2,092 barrels of oil per day, but a mechanical problem down hole compromised the Sag River test. One partner estimated the Sag River could have flowed at 1,000 barrels per day, if unencumbered.
That winter, Brooks Range Petroleum also drilled the Tofkat No. 1 well and two sidetracks east of Nuiqsut. The well collected 10 oil samples from four sandstone reservoirs and found six feet of net pay in the Kuparuk formation, the deepest zone tested. The company also acquired 210 square miles of 3-D seismic over the prospect.
A dispute between partners kept the joint venture from drilling in the winter of 2009, but it returned to Gwydyr Bay in early 2010. The Sak River 1-A sidetrack led partner TG World Energy to relinquish some of its interest in the exploration program. The remaining companies drilled North Shore No. 3, but have not yet released results.
A quick turnaroundFor the past two winters, Brooks Range Petroleum has focused on Mustang.
In early 2011, Brooks Range Petroleum drilled North Tarn No. 1, the only exploration well any company drilled on the North Slope that winter. The well tested targets in the Brookian formation and the deeper Kuparuk formation. Brooks Range Petroleum originally estimated the Brookian reservoir might contain some 35 million barrels of oil and the Kuparuk reservoir might contain an additional 6 million barrels of oil.
North Tarn No. 1 found oil, but well control challenges kept the company from testing the well at the time. The joint venture began a sidetrack, North Tarn No. 1-A, but suspended the well at the end of the winter drilling season. In early 2012, Brooks Range Petroleum completed the sidetrack and drilled the Mustang No. 1 delineation well.
While the joint venture originally planned to drill as many as three Mustang exploration wells, it said it learned what it needed to learn after just one well and released its rig.
What Brooks Range Petroleum learned was the Kuparuk sands at Mustang held more recoverable oil than it originally estimated. “The Kuparuk is good quality sands with excellent pressure and oil flow capability,” Thompson told Petroleum News in April.
At the time, the company announced a 40 million barrel oil discovery at Mustang, estimating the field could produce for 15 years and peak at 13,500 barrels per day.
And while the oil shows in the Brookian sands were of “lower permeability than anticipated,” Brooks Range Petroleum plans to test ideas for the formation during development. Those ideas include long horizontal wells completed with fracturing, or recompleting depleted Kuparuk producing wells into the Brookian using horizontals.
Additionally, Brooks Range Petroleum wants to explore a potential Kuparuk formation extension to the northwest called Appaloosa that could add reserves and field life.
Exploration still a focusWith a successful development plan, Mustang would make Brooks Range Petroleum a producer after more than a decade as one of the most prolific explorers in Alaska.
And while Thompson estimated that some 80 percent of future capital would go toward developing proved oil reserves, the company still plans to remain an active explorer.
Brooks Range Petroleum currently operates four North Slope units — Southern Miluveach, Kachemach and Tofkat in the fairway between the Kuparuk River unit and the Colville River, and Beechey Point in the Gwydyr Bay region north of Prudhoe Bay.
The company once operated another unit called Putu, also located between the Kuparuk River unit and the Colville River, but dropped the 21,947-acre unit in September 2012 to focus its near term resources on Mustang. Brooks Range Petroleum also dropped 42,119 acres from the west side of Beechey Point, totaling some 80 percent of the unit area.
The company is awaiting approval of a fifth unit, the proposed Telemark unit over leases on the eastern North Slope, in the area south of the Badami and Point Thomson units.
This winter, Brooks Range Petroleum plans to drill a delineation well and one or two sidetracks in the Tofkat unit, offsetting the discovery it made with the Tofkat No. 1 well.
The wells would test 3-D seismic anomalies in the Brookian formation, confirm the size of the previous discovery in the Kuparuk and test the deeper Jurassic by “offsetting two high flow rate Jurassic wells in ConocoPhillips’ Nanuq Field area,” Thompson said.
Brooks Range Petroleum is also evaluating whether to drill as many as two exploration wells this winter at the Kachemach unit, and expects a decision by fall or early winter.
While operating five units again would bring the independent Brooks Range Petroleum back into a tie with the global giant BP for most units on the North Slope, Thompson believes the company can continue geoscience and engineering work on all its units simultaneously and stagger its operations year by year to meet its work commitments.
“The state has allowed us to time various work over the next few years to manageable levels each year for development and exploration, although some exploration locations might be better technically with less chance of being dry holes if drilled in 2014 after seeing results from exploration wells in 2013,” Thompson said. “We plan to talk to the state about this as they are also exposing exploration risk dollars via their tax credits.”
But, Thompson added, “After further geosciences’ review and prioritizing the capital budget, working interest owners may also elect to not proceed with certain unit commitments, and if so, will drop units if that is deemed the best business decision.”
Additionally, the joint venture is evaluating what to do about the roughly 38,700 of its 119,900 gross acres not held by units. Some of those leases are set to expire this fall, and others would expire in subsequent years, if the companies don’t drill and form units.
Eyeing source rocksAs it pursues conventional targets, BRPC is also interested in source rock.
The potential for source rock development is “excellent” under its Tofkat, Kachemach and Southern Miluveach units, and possibly Beechey Point as well, Thompson said.
“As an example, an older well just north of our Southern Miluveach and Kachemach Units flowed clean oil into the drill pipe on a drill stem test from the Shublik shale,” he said.
Brooks Range Petroleum is currently talking to independents and service companies interested in source rock, and plans to hire consultants to evaluate its acreage.
Meanwhile, the company is “closely following” the work Great Bear Petroleum is currently undertaking. “We see Great Bear Petroleum as the ‘leader,’ and we see BRPC strategy as the ‘fastest follower’ in regard to source rock exploitation,” Thompson said.
The state of the industryBrooks Range Petroleum believes its schedule can accommodate all these exploration efforts, but it is looking for partners to help it tackle the workload at all its prospects.
As such, it can offer a glimpse into how its potential partners views Alaska — particularly the balance of exploration credits and progressivity in the current tax code.
Some companies simply wouldn’t even consider working in Alaska because of that tax code, called Alaska’s Clear and Equitable Share, or ACES, according to Thompson.
“We could not get even our toes in the doors with those companies,” he said.
Others believe the tax code is among the most complicated for any oil-producing region, and “not fair” when added on royalties, permitting fees and other state and federal taxes.
“Quite honestly, the momentum of partnering interest recently slowed dramatically when ConocoPhillips announced their second quarter 2012 earnings,” Thompson said.
In its first full quarter as an upstream company, ConocoPhillips released taxation information alongside earnings in its report. ConocoPhillips earned $551 million in Alaska in the second quarter, but paid $1.25 billion in obligations, including $983 million to the state. “This is the highest take of any state in the U.S., and has been the single biggest fear we hear most often,” Thompson said. “It is the reason most companies do not want to put their capital in Alaska and will not consider partnering with BRPC.”
Policymakers frequently discuss the impact of North American unconventional gas supplies on Alaska natural gas development, but Thompson suggests they should also be considering the impact of domestic unconventional oil on North Slope oil development.
Alaska once justified a high government take because it boasted larger resources than other states, Thompson said. “This is simply not true any longer when you consider the huge potential in unconventional source rock resources with much easier and lower cost access in the Lower 48,” he said, pointing to the Bakken, the Eagle Ford and the Permian Basin as well as smaller plays and emerging plays “yet unnamed but easily accessible.”
Many upsides remainBut these potential partners are hopeful, too.
As the debate in Alaska proves, industry favors the revisions Gov. Sean Parnell proposed in House Bill 110 and companies outside the state feel the same way, Thompson said.
And Alaska’s benefits have kept some companies interested, he said.
While Alaska is known for its geologic advantages, Thompson said many potential partners are impressed with its policy advantages. He said some companies, Brooks Range Petroleum among them, consider the ACES tax credits “the best in the nation.”
Those credits are “one of the key reasons why BRPC persists in exploration drilling on the Slope versus just development.” Specifically, Thompson said, the credits allowed Brooks Range Petroleum to add entire wells to its exploration programs some winters.
He considers it a good investment, too: “We calculate the state will fully recover back all the tax credits they paid us on all proprietary seismic acquired and wells drilled by BRPC on the Slope, and then some, within the first two years of oil production at Mustang.”
Additionally, Thompson said, “The state is to be highly complimented in regard to the streamlining of permitting and for facilitating the formation of exploration and development units with clear expectations and commitments on both sides.” He praised the annual areawide lease sales as a model for the federal government and other states.
Geologic advantagesAnd Thompson said some companies still see geologic advantages for oil exploration and development in Alaska, although perhaps not in the way Alaska is used to hearing.
Some companies are interested in conventional exploration targets and some are interested in source rocks. “We believe there are still come ‘company makers’ to be discovered and developed on the Slope. This hope has kept some other producers and private equity firms assessing the possibility of partnering with BRPC,” he said.
But some companies believe the “sweet spots” in the Lower 48 unconventional plays have already been drilled, or at least have already been leased, forcing new entrants to drill in less-productive regions within the plays if they want in, according to Thompson.
“Many source rock operators disagree with this and believe the potential will be as good because the horizontal drilling and fracking technologies continue to improve,” he said.
If future wells in the Lower 48 are less productive than expected, though, it “may make the potential of not only the source rocks but also oil from the lower-permeability sands in the Brookian on the North Slope of more interest to companies,” Thompson said.
To improve the case for Alaska, “the state would need to build gravel access roads to key areas on the southern part of the Slope both east and west if the scale of low-permeability sands and source rock development is to reach the high potential it could be,” he said. “Without the state paying for that basic road infrastructure as other states have done, achieving the logistical scale necessary for those oil resources may not happen.”
How best to proceedAs the North Slope matures, Brooks Range Petroleum is one of a handful of smaller privately held independents trying different strategies for operating on the North Slope.
For more than a decade, Armstrong Oil & Gas Inc. found success by bringing in much larger partners to develop North Slope prospects. And Savant Alaska became the first privately held operator on the North Slope after acquiring the Badami unit from BP.
Brooks Range Petroleum is considering two options.
The first is to partner with a larger company able to bring capital, technical expertise and manpower to the portfolio. “One example of expertise is that our BRPC staff does not have experience in assessing or completing low-permeability sands and source rocks with the modern geosciences’ and engineering technologies available today,” Thompson said. “While we have some of the best conventional exploration expertise on the North Slope, we are honest with ourselves that we lack unconventional play expertise.”
The second is to pursue near-term private equity and potentially take the company public after Mustang comes online. “This would create the first, Alaska-only public oil company which could access capital from the equity markets and allow us to ‘go it alone,’” he said.