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Vol. 16, No. 11 Week of March 13, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Repsol takes 70%

Pace of exploration tied to tax changes; Armstrong heads up operations

Kay Cashman & Kristen Nelson

Petroleum News

Denver-based Armstrong Oil and Gas has done it again: Assembled an acreage position in northern Alaska and brought in a large partner to develop North Slope and nearshore Beaufort Sea prospects.

This time the partner is Spanish oil mega-major Repsol YPF and the acreage is the largest block yet — 2,000 square kilometers, or 494,211 acres, including everything Armstrong, bidding as 70 & 148 LLC, won in state areawide lease sales in 2008 and 2009 south of the Kuparuk River unit, in the White Hills area and near the Oooguruk unit. All of GMT Exploration LLC’s northern Alaska acreage was also picked up in the deal. GMT is a Denver independent that Armstrong brought to Alaska in early 2010.

Exploration drilling on the acreage will begin next winter, per a March 7 press release from Repsol, which said it had agreed to “a broad-reaching exploration and development program,” with Repsol and Armstrong’s 70 & 148 “collaborating on all aspects of the program.”

A Petroleum News source close to the three partners said Repsol asked Armstrong to oversee operations because of the independent’s previous experience in permitting and executing northern Alaska exploration programs.

Under the agreement, Repsol holds a 70 percent working interest in the acreage; the remaining 30 percent is 75 percent held by Armstrong and 25 percent by GMT.

Armstrong, GMT taking little cash

Madrid-based Repsol said it has committed to supplying “the investment necessary to explore and evaluate the economic viability of the resources contained in these blocks,” which it noted are close to producing fields (see map adjacent to this article from Repsol).

The “minimum exposure” for Repsol, “including amounts to be paid to its partners and the cost of exploration to be carried out over several years, amounts to $768 million,” the release said.

Petroleum News sources say Armstrong and GMT are receiving very little cash in the deal; that $750 million is slated for exploration. “They want to see their leasehold explored and developed. That’s the payoff for them,” one PN source said.

Changes in ACES expected

What wasn’t said in Repsol’s press release, Petroleum News sources contend, is that the Spanish major expects Alaska Gov. Sean Parnell’s proposed changes in Alaska’s production tax to pass into law.

It’s not hard to believe. Just three weeks before the long-awaited deal closed with Repsol, Armstrong Vice President Ed Kerr submitted a letter to the co-chairs of the Alaska Legislature’s House Resources Committee, saying that the governor’s bill, “HB 110 will have a significant impact on our capital expenditures and futures activities in Alaska. The improved fiscal terms as proposed by HB 110, particularly the portions of the bill that apply to activities outside of existing units, will give us the needed incentive to not only drill multiple new wildcat and delineation wells, but the motivation to drive certain projects to development.”

Kerr said Armstrong has “more than a dozen ideas outside of existing producing units” on its project list, ideas it hopes to drill and test over the next several years.

“In many cases we know the oil is in place. The improved fiscal terms as provided in HB 110 will greatly affect whether these projects will get developed.”

Conventional hydrocarbons only

Although some of the acreage held by Armstrong and GMT contains shale source rock, at this point the partners are only interested in conventional oil targets, a source close to Armstrong told Petroleum News.

That information is supported by previous statements by Armstrong’s top executive, Bill Armstrong, who said his company had taken a look at the Shublik shale in its acreage, but elected to stick with conventional targets because of the significant remaining potential of conventional oil on the North Slope.

The Shublik is one of Alaska’s three major source rocks that generated the oil and gas in the fields along the Barrow Arch, including Point Thomson, Prudhoe Bay, Kuparuk and Alpine.

Sold on Alaska

Except for needing tax relief, Repsol appears sold on Alaska.

“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,” the company said in its press release. “This acreage also helps increase the company’s presence in OECD (Organization for Economic Cooperation and Development) countries. In the United States, Repsol has already successfully explored for and developed hydrocarbons production in the Gulf of Mexico.”

The company has been shifting resources away from its Argentine operations, which are beleaguered by political interference and declining production. Plans to increase exploration in Libya this year have been disrupted by political unrest that industry observers say could result in moving that investment to other oil regions of the world. (See related story on page 12 of this issue.)

Repsol Chairman Antonio Brufau was quoted in the March 7 release about Alaska as saying, “This deal is a perfect fit in our efforts to balance our exploration portfolio with lower risk, onshore oil opportunities in a stable environment. 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.”

Repsol’s presence in Alaska complements the company’s successful work in the Gulf of Mexico, its release said.

“Repsol has significantly boosted its onshore and offshore exploration activities in the last five years, resulting in some of the world’s largest oil and gas discoveries. Repsol’s upstream unit in 2010 posted a record reserve replacement ratio of 131 percent and incorporated resources that have significantly boosted the company’s future prospects,” the company said.

History of partners in Alaska

Armstrong Oil and Gas came to Alaska in 2001, picking up tracts in the state’s areawide Beaufort Sea lease sale. In 2002, Armstrong brought in Dallas-based Pioneer Natural Resources. In early 2004, Armstrong brought in Oklahoma City-based Kerr-McGee and in August 2005, Armstrong sold all of its Alaska interests to Italian major Eni Petroleum, which by that time had purchased all of Kerr-McGee’s Alaska interests from Anadarko Petroleum, following Anadarko’s acquisition of Kerr-McGee.

Armstrong’s North Slope prospects have been developed as Oooguruk, operated by Pioneer, and Eni-operated Nikaitchuq; both are currently producing oil.

After selling its northern Alaska acreage, Armstrong acquired onshore Cook Inlet basin assets and as Armstrong Cook Inlet LLC holds 3,541 acres on the Kenai Peninsula, where it and partners are developing the North Fork natural gas field. GMT holds 20 and 30 percent of those leases.

Repsol has interests in Alaska, but none — until now — on State of Alaska acreage.

The company is a 20 percent partner with Shell and Eni, each 40 percent, in outer continental shelf Beaufort Sea acreage, and a 20 percent partner with Eni in other acreage in which Eni holds 80 percent, from federal lease sales 195 and 202. Repsol did not bid in either sale 195 in 2005 or sale 202 in 2007, but subsequently partnered in acreage from those leases.

Repsol acquired OCS acreage on its own in 2008 in Chukchi Sea sale 193; exploration activities on that acreage are currently enjoined under order of the U.S. District Court for the District of Alaska. The company bid $15.6 million on 104 blocks and was the high bidder on 93 blocks for $14.4 million.

Repsol has not said whether it will operate its Chukchi leases, but rumors of a potential partnership with Shell, Eni and/or Statoil have made their way to Petroleum News. None of those rumors have been confirmed by any of the companies.

Tudor Pickering and Holt, a Houston based energy investment bank, acted as advisor to Armstrong and GMT on the transaction with Repsol.

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