Caelus making cutsCompany suspending drilling and laying off 25 percent of Alaska workforce By ALAN BAILEY Petroleum News
Caelus Energy Alaska is suspending drilling operations in its Oooguruk oil field and laying off 25 percent of its Alaska workforce, the company has announced. In an April 8 letter to Gov. Bill Walker, copied to members of the Alaska Legislature, James Musselman, Caelus Energy president and CEO, said that the cutbacks result from “the prolonged depression in oil prices and uncertainty in Alaska’s oil tax system.” While, under current oil prices, the level of government take on the Oooguruk field leaves Caelus with nothing, the state government is proposing to try to take an even larger piece, Musselman wrote.
In addition to the recent oil price crash Musselman was referring to proposed changes to the tax rules and to the system of tax credits that apply to state oil and gas production taxes. The governor has introduced bills for the changes and the Legislature has been debating and modifying the bills, as a possible way to help address the state budget deficit.
During an April 9 hearing by the Senate Resources Committee of Senate Bill 130, the Senate version of the governor’s bill, Pat Foley, Caelus Energy Alaska senior vice president, said that drilling cessation at the Oooguruk field, offshore the central North Slope, would involve the suspension of the Nabors 19AC drilling rig. The operation of the rig, which has been in continuous use at Oooguruk since 2008, involves the employment of nearly 300 contractors, Foley said.
“Those jobs will be, at least I hope temporarily, put on the shelf,” he said.
Foley commented that, like many other oil companies in the United States today, Caelus is struggling to survive in the face of the fall in the price of oil.
“Our contractors have done a huge amount of assistance to help us drive out waste and reduce their costs wherever they can, but now the only tools that remain to us are a reduction in our capital program and a reduction in our general and administrative expenses, which simply means that we have to cut payroll,” Foley said. In reference to the cuts in Caelus’ own workforce, Foley reflected on the pain he felt at the prospect of having to tell hard working, dedicated people, many of whom he considered friends, that within a few days their employment would end.
Foley emphasized that, despite the job cuts, Caelus would continue to maintain its wells and facilities.
“We are going to continue with the same HSE (health, safety and environment) program that we have, but we’re going to simply have to find a way to accomplish our objectives with fewer people,” Foley said.
Foley also commented that Caelus’ Nuna project would remain on hold. Nuna involves the development from an onshore drill pad of a new, relatively shallow oil pool at Oooguruk. Caelus has built the pad for the project but has delayed the installation of the facilities needed for the development.
Smith Bay encouraging On a more upbeat note, Foley commented that Caelus has completed the two exploration wells that it has been drilling this winter at Smith Bay, 59 miles southeast of Barrow, and has been sufficiently encouraged by the results to want to return to the area to do further drilling next year.
“We’ve had very exciting and encouraging results from those two wells,” Foley said. “We are currently trying to plan activities to be back out there again next winter to continue with an appraisal program. I hope someday to get to appear before you to talk about our development plans at Smith Bay.”
Foley also said that Caelus anticipates completing its fracking operations in all of its Oooguruk wells over the next month, to stimulate oil production. On April 8 the field produced about 18,000 barrels of oil - the stimulation program should elevate that production rate to more than 20,000 barrels per day, he said. Thereafter, as is usual, production would enter a long-term decline over the course of around 30 years, he said.
$2 billion investment Foley said that Pioneer Natural Resources, the original developer of the Oooguruk field, and Caelus, the current field operator, had between them spent about $2 billion in Alaska. So far the field has produced about 23 million barrels of oil. Over the past year Caelus has executed a capital drilling program of roughly $300 million and, as a consequence, has earned about $100 million in transferrable tax credits, Foley said. The company has employed about 300 Alaskans, he said.
From an exploration perspective, Caelus has acquired about 400,000 acres in leases in the past two years, conducted two substantial 3-D seismic programs and drilled the wells at Smith Bay, Foley said.
But, with no excess of revenue over costs in its Alaska operations at the moment, and with the possibility of tax credit reductions, Caelus has been forced to suspend its drilling operations, he said. Low oil price Asked by Sen. Cathy Giessel if the rig suspension and layoffs would occur in the current oil price environment, regardless of what happens to the tax credits, Foley said that the low oil price is the immediate driver for the cutbacks. However, a reduction in the tax credits would increase the amount of capital needed to fund drilling and that, in turn, would drive a need for a higher oil price threshold at which drilling could restart, he said.
Sen. Mia Costello questioned how the investment community is responding to the tax bills that the Legislature is debating.
“In a word, I think they’re terrified,” Foley said. “The big investment communities, they need favorable fiscal terms; maybe even more important than that, they need stability, they need predictability.”
And, asked by Costello about the total government take from the Oooguruk field, Foley said that Caelus pays royalties on oil production and pays property taxes for the field.
“At today’s (oil) prices I have no profits, so my take is zero,” Foley said. “So I think the government take could be described as 100 percent.”
Sen. Bill Wielechowski asked whether, if the Legislature leaves the tax structure as it is, would Caelus stay in Alaska and keep up current work levels. Foley responded that Caelus has no plans to leave the state and will continue to operate the Oooguruk field. But the company needs oil price recovery to make capital investments, with the tax structure determining the price level at which those investments would become economic.
Impact on business value During his presentation, Foley said that the governor’s tax proposals, if implemented in full, would reduce the net present value of Caelus’ Alaska business by 83 percent, assuming a discount rate of 10 percent and a 2016 oil price of $36 to $37, increasing to $52 over the next five years. A version of the bill which recently came out of the House would reduce the net present value by nearly 50 percent, he said.
The Nuna development, which Foley characterized as “on the bubble,” is the type of project that needs some oil price recovery to go forward, Foley said. At a price level of $70, a level at which the project would probably progress, under current tax rules Caelus would probably receive about $250 million in state tax credits. Those credits would be offset by an equivalent amount of money in production tax payments to the state. But an additional $1.5 billion would come to the state in the form of state royalties and net profit share payments due on the leases, Foley said.
Nuna represents an oil resource of 100 million barrels, with peak production of 20,000 to 25,000 barrels of oil per day, and with employment of nearly 300 contractor personnel during two years of construction, coupled with four or five years of drilling, Foley said.
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