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Vol. 13, No. 2 Week of January 13, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

UltraStar soldiers on

Weeks pursuing Dewline Deep despite BP’s reluctance to operate; AVCG wants in

Alan Bailey

Petroleum News

It seems that persistence is a key attribute for a small independent oil producer wanting to break into the North Slope oil scene. That’s certainly the case with UltraStar Petroleum, the tiny independent that wants to drill an oil prospect called Dewline Deep, west of Point McIntyre on the north side of the Prudhoe Bay unit. In the latest twist in the multi-year saga of getting a hole punched into the prospect, BP has pulled back from operating the well, Jim Weeks, managing member of UltraStar and sister company Winstar Petroleum told Petroleum News Jan. 9.

And just to compound the problems, the new ACES state tax legislation has injected some major uncertainties into the project economics, Weeks said.

But, in a spirit of don’t give up until job’s done, Weeks is soldiering on.

Weeks said that there are new investors, including Alaska Venture Capital Group, lined up to participate in the project. As a consequence Weeks plans to form a new company, Dewline Petroleum LLC, for the drilling. And AVCG operating company Brooks Range Petroleum Corp. may operate the well instead of BP.

“We’re talking to Brooks Range about operating the well,” Weeks said.

Started in 2003

The story of Dewline Deep goes back to 2003, when UltraStar obtained some 3-D seismic data for the company’s lease area west of Point McIntyre from BP, ConocoPhillips and ExxonMobil. Petrotechnical Resources of Alaska identified several prospects from the seismic. UltraStar elected to pursue the drilling of one of those prospects, Dewline Deep, estimated to contain 5 million to 20 million barrels of oil in the Ivishak and Sag River formations.

UltraStar hoped to directionally drill Dewline Deep from the neighboring Point McIntyre No. 1 drill pad, to avoid the cost of building an ice road and ice pad.

In 2004 UltraStar entered into lengthy negotiations with BP for access to the drill site, and for processing any Dewline Deep production through the Lisburne production center — Weeks considered it essential to have the commercial arrangements for oil production in place prior to starting any drilling.

And in 2006 UltraStar and BP agreed on what Weeks described “reasonable numbers” for access and other fees for the use of the Lisburne facilities.

“We said we’re going to proceed on that basis,” Weeks said.

As part of the commercial arrangements, BP agreed to operate the UltraStar-funded well, provided the deal involved no additional cost or risk to BP. And BP required UltraStar to place the $8 million to $9 million drilling cost in a BP escrow account prior to the start of drilling.

Unit expansion

The commercial arrangements for the drilling would also involve expansion of the Prudhoe Bay Unit to include Dewline Deep, thus placing the drilling operation within the scope of the oil spill contingency and bonding arrangements for Prudhoe Bay.

But the unit expansion application required a joinder agreement between the Dewline Deep tract owners and the Prudhoe Bay Unit owners, an agreement that required lengthy negotiations.

Meantime, other events were taking place on the North Slope. The Prudhoe Bay transit line oil spill had placed BP’s operations under a heightened level of scrutiny. And the indictment of state legislators for corruption coupled with lower than expected revenues from the new state PPT tax led to a special session of the state Legislature and the enactment of the ACES tax legislation.

Given all of these events and the fact that BP has come under a very high level of scrutiny regarding its North Slope operations, BP has said that it no longer wants to operate the Dewline Deep well. And so the unit expansion application has come to a halt along with the Dewline Deep drilling plans.

Devil in the details

In addition, the devils in the details of the ACES legislation have introduced some significant financial uncertainties into the project.

For example, payments made to BP for the use of the Lisburne facilities would offset some BP tax deductible operating expenses, in effect causing the payments to be taxed at the ACES tax rate.

“Under ACES any revenue to (BP) from facility access fees is considered production revenue … that increases their production taxes,” Weeks said.

To compensate BP for this, UltraStar would have to gross up the payments, thus increasing the payments by perhaps 70 percent. Although UltraStar may be able to claim the payments as a deduction under its ACES liability, it is not clear to what extent this could be done, especially given the fact that one component of the payments relates to compensation for Lisburne capital costs, rather than operating expenses.

In addition, it would appear that the escrow funds for the drilling would trigger a BP ACES tax liability, thus triggering a need to gross up those funds as well, Weeks said.

“Whether we can deduct that is questionable,” he said.

Viable project

Weeks thinks that the Dewline Deep project will be viable at likely future oil prices, depending on the answers to some of the ACES tax questions. Weeks also hopes that BP will still allow use of the Point McIntyre well pad.

“They’re willing to talk about still giving us access to the pad or an ice pad extension to the pad,” Weeks said.

The well surface location needs to be confirmed, to verify the project costs before bringing new investors on board and forming the new Dewline Petroleum company.

However, Weeks emphasized that the oil majors on the North Slope have supported the project in licensing seismic data and negotiating reasonable terms for facility access. ExxonMobil, for example, had agreed to the licensing of 24 square miles of 3-D seismic data, despite being under no obligation to do so. And terms for using the Lisburne facilities still stand.

“The deal’s a reasonable deal. It’s on the table as far as the processing fees. … We’ll work through it. I think we still have a project,” Weeks said.

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