Royalty relief for NunaDNR makes final finding on 5% royalty rate for new Oooguruk development Alan Bailey Petroleum News
The Alaska Department of Natural Resources has confirmed that it will set a reduced royalty rate for production from Caelus Natural Resources Alaska’s planned Nuna development in the Oooguruk field under the nearshore waters of the Beaufort Sea. Caelus had said that the development would be uneconomic without the royalty reduction. In a final finding dated Jan. 20, Marty Rutherford, acting commissioner of DNR, said that that DNR had determined that Caelus had met all of the necessary requirements for royalty modifications.
“Our extensive review and analysis of the proposed Nuna project indicates that it will not proceed without royalty modification. The benefits to the state - in terms of increased revenue, production, jobs and new information that will spur additional North Slope projects - starkly outweigh the cost of the royalty modification,” Rutherford said when announcing the department’s decision.
New development Caelus’ Nuna project involves the development of the Torok formation from an onshore drilling pad. The company already produces oil from a single well that penetrates the Torok from the Oooguruk drilling island, offshore in the Beaufort Sea. However, especially given the compartmentalized nature of the Torok reservoir, production from the thicker and more nearshore sections of the reservoir is not possible without the drilling of onshore wells. The Torok is the youngest and shallowest of the reservoir systems in the Oooguruk unit.
The compartmentalized and discontinuous nature of the Torok reservoir makes the reservoir particularly challenging to develop, possibly requiring multi-stage hydraulic fracturing, as in a shale-oil development.
Five percent royalty rate Under the terms of its final finding, DNR is setting a 5 percent royalty rate for initial production from the Torok from five leases in the Oooguruk unit. That royalty relief will remain in effect until Caelus has achieved cumulative production with a total wellhead value of $1.25 billion as a consequence of the Nuna development. The normal legal minimum royalty rate for oil produced from Alaska state lands is 12.5 percent. However, under state statutes, the state can, at its discretion, reduce that rate to a minimum of 5 percent to encourage production from an otherwise uneconomic oil pool, or to a minimum of 3 percent to prolong the life of a currently producing pool.
In coming to its decision DNR used the second of those criteria - the desire to extend the life of Torok production - because of the existing production from the Torok from the Oooguruk island. However, the department has elected to set a 5 percent royalty rate rather than the minimum 3 percent rate that is legally permissible.
To obtain the reduced royalty rate Caelus must sanction the Nuna project by March 31; initiate capital expenditure by Sept. 30; and spend at least $260 million of that expenditure by Sept. 30, 2017, by which date sustained production must start.
Non-confidential report required The DNR finding also stipulates that 24 months after the start of sustained commercial production from the onshore Nuna drilling pad Caelus must deliver a non-confidential project summary to DNR, to share project learnings with DNR and the other North Slope operators free of charge, “to better understand the challenges and successes of developing similar geologic formations to promote continued development of the state’s resources.” DNR will determine whether the summary contains sufficient detail. The department can, if necessary, require Caelus to add more detail and, ultimately, rescind the royalty relief if sufficient detail is not forthcoming.
The finding also allows Caelus to increase the rate at which it deducts the costs associated with North Slope facility sharing from the wellhead value of the Nuna oil, thus further reducing royalty payments, if the company can prove that 80 percent of its Nuna workforce is resident in Alaska.
DNR analysis DNR has done its own analysis of the economics of the Nuna project and has concluded that the project would be uneconomic without royalty relief. The department’s economic analysis used a range of possible recoverable oil reserves and oil prices ranging from $50 to $130 per barrel, with a median price of $90 per barrel. The results showed that, without the royalty relief, the development would lose money in at least 50 percent of the economic scenarios, under assumed rate of return requirements of 15 percent or more.
And the department recognized the risks and uncertainties associated with the project.
“Based on these mediocre economic results relative to the risk of loss, Caelus has made a clear and convincing case that without royalty modification the investment in the Nuna project is uneconomic,” the finding says.
Net benefit to state Being what is referred to as “new oil,” under the new Alaska oil production tax system, Nuna oil will be taxed at a preferential rate. And, taking into account factors such as tax credits, the value of the resulting tax may be slightly negative, the finding says. However, both the Caelus and the DNR economic analyses have taken this tax situation into account, the finding says. And, given potential state revenues from sources including royalties, property taxes and possible corporate income tax, DNR has computed a total expected value to the state of around $1.2 billion if the Nuna development proceeds with the royalty reduction in place.
Caelus spokesman Casey Sullivan told Petroleum News in a Jan. 21 email that his company is still evaluating the final finding.
“We appreciate the considerable analysis conducted by Gov. Walker and his team at the Department of Natural Resources,” Sullivan said. “The state’s final findings and determination substantiates that the Nuna project, while challenged, could economically benefit Alaska, produce new oil through TAPS (the trans-Alaska oil pipeline) and create good jobs for Alaskans.”
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