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Vol. 17, No. 48 Week of November 25, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2012: Repsol to drill three prospects

Wants ‘meaningful changes’ to Alaska production tax before moving forward with new development

Kay Cashman

Petroleum News

In early 2011 the U.S. subsidiary of Spanish major Repsol YPF S.A. went from being a leaseholder without any definite exploration plans for Alaska to one of the most active exploration companies in the state.

Repsol E&P USA Inc. held federal leases in both the Beaufort and Chukchi seas for years, but didn’t capture the attention of state policymakers until March 2011, when it launched a $768 million exploration program across 494,211 acres of state land and water.

The acreage was assembled over a three-year period by Armstrong Oil & Gas subsidiary 70 & 148 LLC and GMT Exploration LLC, a fellow a Denver independent that Armstrong brought to Alaska in early 2010.

Armstrong was the independent responsible for bringing Pioneer Natural Resources and Eni Petroleum to Alaska.

Repsol’s new acreage included everything Armstrong, bidding as 70 & 148 LLC, won in state areawide lease sales in 2008 and 2009. All of GMT Exploration LLC’s northern Alaska acreage was also picked up in the deal, leaving 70 & 148 and GMT with a 30 percent cut — 75 percent held by 70 & 148 and 25 percent by GMT — and operator Repsol with 70 percent.

“This deal is a perfect fit in our efforts to balance our exploration portfolio with lower risk, onshore oil opportunities in a stable environment,” Repsol Chairman Antonio Brufau said in March 2011. “We are confident that our worldwide experience combined with a partner with an extensive local knowledge is going to deliver value in the near future.”

First leases in OCS

Repsol traces its lineage to a state-owned petroleum industry monopoly created before the Spanish Civil War and reorganized often in the following decades. Repsol became a private company in the late 1980s and gradually expanded internationally.

With some 40,000 employees working in almost 30 countries, Repsol is one of the 10 largest private oil companies in the world.

Repsol first arrived in Alaska through two partnerships in the outer continental shelf Beaufort Sea. Although it did not bid in sale 195 or 202, Repsol later acquired a 20 percent interest in acreage held by Shell (40 percent) and Eni (40 percent), and a 20 percent interest in acreage held by Eni (80 percent) leased during those federal sales.

In February 2008, Repsol made $14.4 million in high bids on 93 blocks in sale 193 in the Chukchi Sea.

“The North Slope of Alaska is an especially promising area for Repsol as it has already shown to be oil-rich and carries low exploratory risk. This acreage also helps increase the company’s presence in OECD countries,” the company wrote in a press release in March 2011.

Using five rigs for program

The acreage Repsol acquired is clustered in three general areas: south of the Kuparuk River unit, in the White Hills region and near the offshore Oooguruk unit.

Initially, in the winter of 2011-12, Repsol planned to build five ice pads and drill a vertical well and as many as two sidetracks from each, with a measured well depth of some 12,000 to 16,000 feet.

But facing local Native opposition to such an unprecedented large program, Repsol’s U.S. leadership Greg Smith, director of the company’s U.S. Business Unit, and Bill Hardham, Alaska project manager, elected to go with four pads, with no more than three rigs working at one time.

The four proposed drilling locations would run down what is known as the “billion-dollar fairway,” a rich, not fully explored, north-south trending long rectangle with a western edge a few miles inside NPR-A and an eastern boundary reaching the Kuparuk and Tarn oil fields. The fairway extends north to south from the nearshore Beaufort Sea to an area several miles south of Tarn. The Alpine oil field and its satellites lie inside the fairway.

A gas kick in 2012 at Qugruk No. 2 disrupted Repsol’s drilling program. In the end two vertical wells were completed by the end of a short winter exploration season — Kachemach No. 1 (10,100 feet) and Qugruk No. 4 (7,700 feet).

The Qugruk well was located near the Beaufort Sea coast on the Colville River Delta, with the Kachemach well some distance to the south, just east of the Meltwater participating area of the Kuparuk River unit.

Following are Petroleum News questions answered by Hardham on Oct. 17, 2012:

Q. Are 70 & 148 LLC, an Armstrong affiliate, and GMT Exploration still 30 percent partners in your North Slope and near-shore Beaufort Sea acreage and wells in Alaska? If not, how has that percentage and relationship changed since March 2011?

A. Armstrong and GMT are still our 30 percent partners. Together we have bid on additional North Slope leases within the last year.

Q. Please describe Repsol’s current acreage position in Alaska:

A. Federal waters:

•165 blocks in onshore exploration with a total surface area of 2,314.84 km2 (square kilometers).

*93 blocks offshore in Chukchi Sea with 2,142.72 km2.

•71 contracts in blocks corresponding to Beaufort Sea with a total area amounting to 1,511.33 km2.

Onshore — 154 leases with a gross km2 of 2,147.04, net 1,502.93 (503,545 acres)

•11 Pending Assignments from 70 & 148 in NPR-A area with a gross km2 of 251.08, net 175.76 (62,043 acres)

•11 Pending Assignments from 70 & 148 North Slope Area, acreage has not been confirmed

•25 New leases, awarded but still in the process of execution, gross km2 of 164.275 and net 155 (40,593 acres) (Repsol will assign 30 percent)

Q. What is Repsol’s take on Alaska, now that it has one exploration season under its belt?

A. We are committed and enthusiastic about our prospects in Alaska. However we will need to see some meaningful changes in the production tax structure in order to go forward with any new development projects.

Q. After listening to concerns expressed by residents of Nuiqsut, a community near the planned drilling locations, Repsol decided to scale back its 2011-12 winter exploration season drilling plan. Did Repsol lose any State of Alaska leases because it didn’t drill from all five locations?

A. We fully understand that we need to work with the local communities in a sustainable way. Some North Slope residents had some legitimate concerns about our 2011 program, so we made some changes based on their input. We did not lose any leases because of the changes.

Q. This winter, 2012-13, will Repsol essentially complete the five-pad program it initially proposed for last winter?

A. We drilled two of five prospects last year, and plan to drill the remaining three this year.

Q. How many wells (individual penetrations) do you expect to drill this winter and from which pads (name and general location)? What will be the purpose/target(s) of each penetration?

A. The three wells we are planning this year are called Qugruk-1, Qugruk-3, and Qugruk-6. Q-1 and Q-6 are planned to be very similar with a pilot hole to about 7,000 feet, and then a horizontal sidetrack and well test. Q-3 is planned to be a vertical well to 9,000 feet, followed by a geologic sidetrack.

Q. Is one of the wells at the location of Qugruk 2, but with a slightly different bottomhole location?

A. Q-6 is targeting the same objective as the Q-2 well, but will be drilled from a different surface location.

Q. How many miles of ice road will you build to access these pads, and please provide a general description of each road, including start and stopping points?

A. We plan to build approximately 30 miles of ice road this winter to reach the three drilling locations. We plan to start the road at DS 2M pad and head NW to the Colville River, at which point, one segment would head SW to our Q-3 location, while the other segment would head across the Colville River to the Q-1 and Q-6 locations.

Q. Will you be sharing any ice roads with other operators? If so, please provide a start and stopping point, as well as the other operator(s) name.

A. No.

Q. Which rig will be used on each of the pads?

A. We plan to utilize three Nabors drilling rigs for our program, the Nabors 9ES, 99AC, and 105AC.

Q. Which company is your general contractor this winter?

A. We will utilize and manage many different contractors.

Q. What did you find in the two wells you drilled last winter?

A. Resources were found in both of the wells. We will continue analyzing the results before going any further with either well.

Q. When will Repsol likely begin development drilling on its North Slope onshore and nearshore Beaufort Sea state leases?

A. We are performing preliminary studies to determine the feasibility of any development, but we are not ready to move forward on that yet.

Q. What type of exploration work do you have planned for your offshore federal leases?

A. It’s too early to discuss plans for our offshore leases.

Q. If you could offer advice to the State of Alaska regarding its controversial leasing and taxation regimes, what would you say?

A. We do not have any material concerns with the leasing process. However, the current tax structure is a deterrent to future development. Meaningful tax reform would incentivize new oil field development, which would add significant state revenue and create thousands of local jobs. Alaska offers great exploration potential, but it is also a challenging and expensive operating environment. Repsol management will be evaluating the economics of developing Alaska projects and comparing these prospects with other worldwide opportunities.

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