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Vol. 19, No. 5 Week of February 02, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Repsol ready, cautious

Repsol primed for development, but wants current fiscal system to stay in place

Eric Lidji

For Petroleum News

Repsol E&P USA Inc. is looking at its most important season in Alaska, to date.

After announcing three discoveries last year, the Spanish major is planning a three-well program this winter — a pair of appraisal wells in the Colville River Delta and an exploration well south of the Prudhoe Bay and Kuparuk River units. With the appraisal wells, Repsol is attempting to alleviate uncertainties around those discoveries with the goal of sanctioning a major development program, according to Repsol Alaska Project Manager Bill Hardham, who spoke at the Alaska Support Industry Alliance on Jan. 23.

While declining to offer a timeline for development, Hardham said, “I feel confident it’s coming. It’s not a matter of if, but when.” But Hardham also warned, “The predictability of the regulations and tax structure is key to making these big investment decisions.”

It’s certainly no surprise to hear an oil company advocate for low and stable taxes over high and shifting taxes, and Repsol has never given a straightforward ultimatum about what might happen if voters over turn the new fiscal system in a referendum this summer, but Hardham listed taxation alongside geophysical analysis and stakeholder engagement as the major “uncertainties” Repsol must resolve before it could sanction development.

Pursuing OECD opportunities

The original Repsol was primarily a European downstream company before it acquired the Argentinean company YPF in 1999 and created the multinational Repsol YPF S.A.

Today, Repsol operates in more than 30 countries around the world.

With its portfolio weighted toward South America and Africa, Repsol made a decision over the past decade to grow its presence in developed economies. The strategic plan took on greater weight after Repsol temporarily lost its largest source of production during the uprising in Libya, after Argentina essentially nationalized the YPF portion of the company, and after several other South American countries changed fiscal terms.

This strategy is why Repsol first dipped its toe in Alaska waters. The company partnered with Shell and Eni on a block of federal leases in the Beaufort Sea in 2007 and spent some $14.4 million on high bids in the record-breaking federal lease sale in the Chukchi Sea in early 2008. But, Hardham said, Repsol “turned down several opportunities to come in further into Alaska, largely because of the uncompetitive tax structure.”

So what made Repsol purchase a 70 percent working interest in a huge block of North Slope leases held by the Armstrong Oil & Gas subsidiary 70 & 148 LLC and GMT Exploration LLC in March 2011? It was the opportunity and the winds of change, according to Hardham. “Repsol felt that this was the right time, things were changing, it was a good opportunity — they don’t come along very often. It fit with the strategy.”

Tug of war

Just as Pioneer Natural Resources Alaska Inc. became a poster child during debates over Alaska’s Clear and Equitable Share in 2007, Repsol E&P USA is getting stuck in a tug-of-war over the More Alaska Production Act, which replaced the ACES system last year.

The debates over ACES often featured Pioneer Natural Resources.

The large independent operated under three tax systems during the five years it took to reach first oil at its Oooguruk unit, but also earned considerable tax credits in the process.

While much bigger than Pioneer, Repsol also falls in the middle of the spectrum for international oil companies. It is smaller than Shell, Exxon, BP, ConocoPhillips or even Eni, but much larger than the smaller independents working on the North Slope, like Brooks Range Petroleum Corp. or Savant Alaska LLC. As such, some consider it a bellwether: if Repsol wants to invest in Alaska, the investment climate must be good.

When Repsol arrived on the North Slope in March 2011, the company promised to spend $768 million on exploration over “several years.” Lawmakers such as Sen. Bill Wielechowski, an Anchorage Democrat, believed the deal vindicated ACES, which expanded tax credits for exploration but also increased the tax rate when oil prices rise.

To some, the deal suggested a calculus: even with higher taxes, the developed world might be more attractive to oil companies, because of its lower political risks. “They want to enlarge their portfolio (in areas) that are politically stable,” Rep. Paul Seaton told Petroleum News in March 2011. “Even as we, Norway and other countries have higher tax rates than some Third World countries, the political stability is very beneficial.”

Those comments came as lawmakers were beginning to debate changes to ACES. By the time Repsol announced it discoveries in early 2013, those changes had become the law.

Tax changes ‘critical factor’

In announcing the discoveries, Repsol called the recent tax changes “a critical factor in ensuring the development of this project,” a claim Gov. Sean Parnell proudly touted.

“Can you say they made this investment because of the tax change?” House Speaker Mike Chenault told Petroleum News in May 2013, referring to the Repsol discoveries. “I don’t know if you can really say that, but it’s going in the right direction. We are hearing about projects that have a chance of coming online versus where they were pulling projects off the board because they didn’t make economic sense under ACES.”

As the passage of Senate Bill 21 prompted a voter referendum to overturn it, Rep. Les Gara, an Anchorage Democrat, questioned a link between the fiscal system and Repsol’s plans. “Repsol announced two years ago they were going to invest at least three quarters of a billion dollars in Alaska, and if they found oil, more than that,” he told Petroleum News in August 2013. “Well they found oil in the spring and the governor said, hey this is because of SB 21. Folks who are going to try to stop the referendum will say anything they can.”

Today, Repsol claims that its decision to invest so heavily in Alaska in early 2011 was more of an informed risk than vote of confidence. “It was really about timing. … If you wait too long you can’t get the opportunity,” Hardham said. “So Repsol took a bit of a risk. They saw that there was change afoot. There was an opportunity, so we came.”

Repsol believes the current system brings Alaska closer to the Lower 48, where Repsol maintains operations in the Gulf of Mexico and the Midcontinent, according to Hardham.

“If you’re not competitive it gets really tough to develop these projects,” he said.

Three busy winters

The Repsol leasehold is spread across three chunks of the central North Slope.

The first is a T-shaped bundle running up the fairway between the Kuparuk River and Colville River units and spreading along the state waters of the Beaufort Sea. The second is a diagonal swath running south from Kuparuk nearly to the Brooks Range. The third is a smaller bundle hugging a bend in the Colville River south of the village of Nuiqsut.

Repsol initially planned a five-well program for early 2012, but narrowed its efforts to four wells to alleviate local concerns. Those wells were the Qugruk No. 1, Qugruk No. 2 and Qugruk No. 4 along the Colville River Delta and just offshore and the Kachemach No. 1 much further south, near the Meltwater satellite of the Kuparuk River unit.

For the work, the company built 48 miles of ice roads in two segments. The first started at the Kuparuk River unit Drill Site 3S (or Palm satellite) and ran over the frozen coastal waters of the Beaufort. The other ran south from Drill Site 2S (or Meltwater satellite).

After a blowout at the Qugruk No. 2 well delayed its operations for several weeks, Repsol was only able to complete two wells: Qugruk No. 4 and Kachemach No. 1.

For early 2013, Repsol planned a three well program. Those wells were a second attempt at Qugruk No. 1, a Qugruk No. 2 re-drill called Qugruk No. 6 and Qugruk No. 3.

The company built an ice airstrip near Kuparuk Drill Site 2M and 38 miles of ice roads snaking north to Qugruk No. 1 and Qugruk No. 6 and south to Qugruk No. 3.

All three wells encountered hydrocarbons. Repsol performed drill stem tests on Qugruk No. 1 and Qugruk No. 6 and performed some early geotechnical work for development.

This winter, Repsol is appraising those discoveries with the Qugruk No. 5 and Qugruk No. 7 wells. The company recently finished an ice runway and an 18-mile ice road, and plans to spud soon. Repsol is also building a four-mile ice road south from Kuparuk to drill the Tuttu No. 1 exploration well on a lease just south of Prudhoe and Kuparuk.

To bolster those activities, Repsol contracted two 3-D seismic surveys.

SAE Exploration will conduct the Niglik Fiord survey covering some 222.39 square miles just offshore of the Colville River Delta, including the Repsol-operated Qugruk unit. Global Geophysical Services will conduct the Schrader Bluff survey covering some 293.45 square miles south of Prudhoe and Kuparuk, including the Tuttu No. 1 well.

Repsol is also planning some geotechnical work this year.

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