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Vol. 12, No. 46 Week of November 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

THE EXPLORERS 2007: FEX puts NPR-A drilling on pause

Independent remains committed, but concerned about land access, high costs, fiscal regime, postpones drilling for two years

Kay Cashman

Petroleum News

FEX L.P.’s decision to put its Alaska drilling program on pause for two years came as a surprise to everyone except those paying attention to the federal government’s cancellation of National Petroleum Reserve-Alaska lease sales. Land access is the number one issue for the Alaska subsidiary of Calgary-based Talisman Energy, but the independent is also concerned about what it refers to as the “increasing high cost of doing business” on Alaska’s North Slope.

In an Oct. 10, 2007, interview with Petroleum News, Talisman’s senior manager of global new ventures, Tim England, said “Alaska is increasingly less competitive in attracting exploration capital due to the very high costs of remote exploration operations, long timelines for development, many levels of regulatory oversight and less attractive and unstable fiscal terms.”

But FEX would have been back to drill the next winter if the U.S. Bureau of Land Management had not deferred a Northeast NPR-A lease sale from 2007 to sometime in the last half of 2008.

“FEX contemplated a multi-well, multi-year drilling program in NPR-A. … Because the Northeast lease sale was cancelled, we could not move our drilling rig to locations into the Northeast NPR-A for this year. Because we needed to stop and shoot seismic in the Northwest, there was nowhere for the rig to go so we sent it back to Deadhorse,” England said.

To reduce capital exposure per well, he said, a company has to do multi-well drilling programs rather than single drilling programs. For FEX to develop a multi-well program in the Northeast, it needed land released through lease sales.

“BLM has not held a sale in the Northeast planning area of the NPR-A since 2002, contrary to the original plan of conducting sales every other year,” England said.

He said FEX’s activity in the Northeast NPR-A planning area, which was supposed to include wells in the upcoming 2007-08 season, “will be driven by access to land.”

This coming winter FEX will be conducting a $25 million seismic program on and offshore Smith Bay.

“One, we’re looking to complete our subsurface coverage over existing discoveries and, two, if we get a good ice year, we’ll continue to shoot into Smith Bay,” where FEX has State of Alaska leases, he said.

In both cases FEX is looking to identify drilling targets.

“Realistically, the earliest we could get back to operations in the Northwest NPR-A will be 2009-10,” England said, because by the time the seismic acquired in 2007-08 has been evaluated it will be late 2008, too late to plan and prepare for 2008-09 drilling.

Five wildcats, one sidetrack in less than five years

But despite its concerns and its decision to put its Alaska drilling program on a two-year hold, FEX has made a lot of progress since it first entered the state in late 2003.

Initially operating as Fortuna Exploration — later changed to FEX — Talisman’s subsidiary in Alaska’s first step was to farm in to Total E&P USA’s Caribou prospect in Northeast NPR-A, where Total drilled a wildcat in the winter of 2003-04.

In mid-2004 Total E&P USA dropped all but three of its 20 NPR-A leases, assigning eight leases covering the Caribou prospect to Talisman’s Alaska subsidiary.

When asked if FEX would drill a sidetrack or second well on the Caribou prospect the following winter, David Mann, manager of investor relations and corporate communications for Talisman, said the company would drill a NPR-A well in the winter of 2005-06, but he didn’t know if it would be at Caribou.

“Obviously we already have seismic on the Total acreage. And obviously we have our own views on geology and prospectivity,” he said in regard to the 9,362 foot, Caribou 26-11 No. 1 well Total drilled, then plugged and abandoned.

That same year FEX dominated a BLM sale for the Northwest NPR-A planning area where it was the highest bidder with almost $26.5 million in high bids. It also offered the highest amount for a single tract with its winning bid of more than $13.7 million for a lease near the Ikpikpuk River at the junction of the Northwest and Northeast planning areas.

The independent next dominated an October 2004 state Beaufort Sea lease sale, where FEX bid $3.5 million for a block of 19 leases in Harrison Bay offshore NPR-A.

Eight wells in three years

In a July 2005 conference call, Talisman executives said FEX would be drilling two wells in the Northwest planning area during the following winter’s exploration drilling season.

In the same time period a newsletter was distributed to residents of the North Slope Borough saying the two wells would be part of a three-year program for the winters of 2005-06, 2006-07 and 2007-08 in which “a total of two to three drill site ice pads will be constructed per year” east and north of the village of Atqasuk and southeast of Barrow on the company’s acreage in Northwest NPR-A.

In September 2005 paperwork filed with the State of Alaska said FEX was looking at drilling a total of eight exploration wells in the three-year program.

Nabors Rig 14E and supplies were barged to Cape Simpson from West Dock in the summer of 2005. Mobilization via low-pressure vehicles into the area would happen later that year after the tundra was frozen and covered with snow.

Looking for big numbers

By mid-2005 FEX’s acreage in and offshore NPR-A had grown to 443,000 acres.

Talisman Executive Vice President John ‘t Hart, to whom England reported to at that time, said FEX was “looking at very big numbers” from its Alaska acreage — on the order of 250 million barrels of oil equivalent per prospect — with the potential to exceed 1 billion boe from something he referred to as “the structure” within the Northwest area that was to be drilled in the winter of 2005-06. Because of the remoteness of Alaska, he said “we are going for a big prize, bigger than we have ever drilled.”

In early 2006, Talisman CEO Jim Buckee said his company spent C$49 million in Alaska in 2005 on seismic and preparations for exploration drilling.

FEX did drill two wells that winter, although one was a sidetrack — not a separate prospect as originally planned. The exploration drilling season on the North Slope, which is always in the winter when the delicate tundra is frozen and has a protective snow cover, was exceptionally short in 2005-06 due to a lack of snow cover early in the season, preventing tundra access, and an earlier-than-usual spring.

In between, drillers had to shut down more than once for some of the coldest weather on record.

The Aklaq 2 and sidetrack were drilled west of the Ikpikpuk River near the eastern border of the Northwest planning area, 154 miles west of Prudhoe Bay.

Acreage number keeps growing

In the March 1, 2006, State of Alaska areawide Beaufort Sea lease sale FEX took 25 tracts covering 120,000 acres in Smith Bay offshore NPR-A for a total or $1.46 million, bidding from $10.29 to $20.48 an acre. Some of those leases were adjacent to federal leases the company held onshore in NPR-A. (Smith Bay is west of Harrison Bay.)

In addition to complementing the company’s land position south of Cape Simpson, FEX’s leases in Smith Bay could line up with a possible exploration fairway across the northern part of NPR-A to the company’s existing leases on the west side of Harrison Bay, Paul Decker from Alaska’s Division of Oil and Gas told Petroleum News following the lease sale.

Decker saw some particularly interesting exploration possibilities in Smith Bay.

“It’s a nice crestal position on the Barrow Arch, with shallow water and logistically connected to their onshore exploration program in NPR-A,” he said.

People have long known about four oil seeps on the coast at Cape Simpson, just west of Smith Bay. It’s a natural oil trap where Brookian topset sands come up against shale in an ancient incised canyon, Decker said. The oil from the Cape Simpson seeps likely originates from an “oil kitchen” to the north, in a lower Cretaceous source rock system known as the HRZ, Decker said.

“That would put this (Smith Bay) area squarely in between the kitchen and the seeps,” he said. “So you probably have a pretty good plumbing story to be able to charge this with nice light oil.”

In addition to a possible Brookian play, there are potential Ellesmerian plays below the lower Cretaceous unconformity (ancient erosion has probably scoured out the Beaufortian middle and upper Jurassic sands that are found in nearby onshore wells). The East Simpson No. 1 and No. 2 wells on the coast near Smith Bay found some interesting Sadlerochit and Endicott sands below the lower Cretaceous unconformity, Decker said.

Alaska an exercise in logistics

In addition to discovering oil at his company’s first wildcat in NPR-A, the Aklaq 2 and sidetrack, Buckee said his company learned just how cold it could be on Alaska’s North Slope.

“It’s damn cold up there,” he said in a May 10, 2006 conference call.

It’s also surprisingly warm at times, said ’t Hart.

A combination of those two extremes forced FEX to suspend drilling Aklaq 2 and its sidetrack in February in anticipation of future testing.

Buckee and ’t Hart said the challenges ran the gamut from a deep freeze as FEX was barging equipment to the Aklaq site, followed by a warm spell that affected the tundra, then another cold snap.

“Alaska is an exercise in logistics,” said ‘t Hart.

Weather aside, FEX was soon gearing up for its next round of drilling in the winter of 2006-07, this time with two drilling rigs.

Akita to build new Arctic rig

The big Nabors Rig 14E that FEX used in 2005-06 was stacked at a staging area on the shores of Smith Bay. But FEX was also interested in bringing a second, lighter-weight exploration rig to NPR-A — one designed to withstand the rigors of the Far North.

Calgary-based Akita Drilling would build it, FEX said, and Anchorage-based Doyon Drilling would operate it. Each company would own 50 percent of the rig, which would be under contract to FEX and Talisman for an unnamed number of years.

The rig, which would be brought in from the other side of the Colville River via low-pressure vehicles as soon as conditions allowed, was named the Arctic Wolf.

Akita said the new rig would cost $13.2 million to build.

Shooting for five wells

Initially FEX hoped for a favorable 2006-07 season in which five wells south of Cape Simpson and west of the Ikpikpuk River in Northwest NPR-A could be drilled with the two rigs.

The program would involve building up to five ice pads and 81 miles of ice road, as well as one 5,000-foot ice runway and several smaller airstrips, FEX said in paperwork filed with BLM.

Although FEX had nine well locations staked, it said in its plan of operations for the 2006-07 exploration season that “probable well sites would be at Aklaqyaaq No. 1 and Aklaq Nos. 3, 6, and 7” and that “two to three reservoir penetrations may be drilled at each of the locations during the 2006-07 drilling season.”

Picks up more acreage

While making preparations for the 2006-07 drilling season, FEX was picking up more acreage on Alaska’s North Slope.

In the September 2006 BLM lease sale for Northwest NPR-A more than 75 percent ($10 million) of the high bids came from FEX and its 60/40 bidding partner, Petro-Canada.

The partners took some 562,000 acres, paying an average of almost $18.50 an acre, and winning all 48 tracts on which they bid.

FEX/Petro-Canada also had the highest bid per acre for a tract when they took lease 272 at $201.03 per acre for a total price of almost $2.3 million. It was adjacent to a tract FEX paid $5.09 an acre in the 2004 Northwest NPR-A sale.

The companies’ 2006 bids were on tracts south and west of a large block on the northeastern edge of the sale area in which both companies took acreage in the 2004 sale. The new acreage extended as far west as Atqasuk. In the north the companies filled in north and east of 2004 tracts.

Richard Garrard, geoscience manager for FEX and the company’s top man on the ground in Alaska, told Petroleum News after the sale that the sale area is where the company shot proprietary 3-D seismic the previous winter. This was followed by a 2-D program, England said Oct. 10, 2007.

First onshore state acreage

In the October 2006 North Slope areawide lease sale held by the State of Alaska, FEX took its first onshore state acreage — a block of seven leases west of the trans-Alaska oil pipeline including the old Atlantic Richfield Susie 1 well. The company bid $413,805 for the tracts.

The Susie 1 was drilled in 1966 by Richfield, which would soon merge with Atlantic, at a surface geological structure north of Sagwon on the Sagavanirktok River. Richfield drilled down through the crest of the surface anticline at Susie.

“That well went down to 13,500 feet and had some oil shows in the … upper part of the hole,” Gil Mull, an on-site geologist, told Petroleum News in 2002. Unfortunately, the shows did not prove economic for a remote well by 1968 standards and Richfield abandoned the well in December 1966. A year later Atlantic Richfield, predecessor to ARCO, and Humble Oil, predecessor to Exxon, drilled the discovery well at Prudhoe Bay, about 60 miles north of Susie 1.

Mull, who gained a reputation as one of the top geologists working northern Alaska, also said “some of us were pushing hard to continue the Susie well on down to test the Sadlerochit before that well was abandoned.” (The top of the Sadlerochit group is the Ivishak formation that forms the main reservoir in the Prudhoe Bay field.)

FEX, Petro-Canada formally team up

In December 2006 a 30-day public notice was posted by the State of Alaska saying that Calgary-based Petro-Canada’s Alaska subsidiary had submitted an oil discharge prevention and contingency plan for a “multi-year exploration drilling program” in NPR-A. Drilling was to begin in the winter of 2007-08.

But while the company’s spill plan was being processed by the Alaska Department of Environmental Conservation an exploration partnership between FEX and Petro-Canada was being hashed out for all of their tracts in NPR-A, except for Petro-Canada’s acreage in the Brooks Range Foothills which it shared with Anadarko Petroleum and BG Group.

Three wells instead of five

On Jan. 19, 2007, at the Alaska Support Industry Alliance’s annual Meet Alaska conference, England was less enthusiastic about Alaska than he and his superiors had been in the past.

On the one hand FEX was forging ahead with an aggressive exploration program in NPR-A, he said. On the other hand, issues such as land access, rising costs, permitting inefficiency and Alaska’s tax regime threatened the viability of the state’s petroleum exploration and development, England said.

He said that FEX, with almost 1.5 million gross acres under lease, was continuing deep drilling done by industry in the early 1980s. But modern drilling equipment enabled the drilling to be done much more quickly than in the past, he said.

FEX, he said, was planning to spud another deep well, the Aklaqyaaq No. 1, on Jan. 27.

“We should have completed our second ice pad today and we’re expecting to spud our Amaguq No. 2 well on Feb. 7,” England said.

FEX also hoped to spud a third NPR-A well, the Aklaq No. 6, later in the winter, which totaled three wells in NPR-A for 2006-07. This was down the previous goal of as many as five wells because of later than expected tundra access.

Continuing challenges

In his January 2007 speech England said NPR-A exploration continued to face many of the challenges that existed during exploration of the region 20 years earlier. In particular, operational costs were very high and becoming higher.

While industry could manage its costs through partnerships, cost sharing, by becoming more efficient and through the use of new technologies, England said the State of Alaska could also help with cost issues. He especially praised the state’s exploration incentive tax credit program.

“Without those substantial exploration incentive credits we wouldn’t be here,” England said. “That substantially affects our ability to compete for cash to explore in Alaska.”

The state might also be able to help in other ways, he suggested, perhaps through tax credits for operational efficiencies such as the use of modern drilling rigs. Tax incentives for drilling multiple wells in a single drilling season might be another possibility.

England also slammed the state’s switch from a petroleum severance tax to PPT, the new oil and gas production tax passed in 2007, saying it “effected a 25 percent loss in Net Present Value.” (The Alaska Legislature convenes in a special session Oct. 18, 2007, to look at changing the new tax in a manner that might increase the state’s take.)

Land access

Access to North Slope land was also proving problematic, England said in his January 2007 speech, noting there had been a time lag of two years between successive NPR-A lease sales, and third-party pressure had caused lease sale cancellations and postponements.

“The federal administration should really think about holding more frequent lease sales, providing greater access to its lands,” England said.

He also said that industry and government needed to take the appropriate steps to curtail “nuisance litigation,” saying that he had estimated that industry had expended about $40 million in preparing for the September 2006 NPR-A lease, a substantial part of which was pulled from the sale because of a court ruling.

“Those (costs) are large numbers and we are less receptive to keep doing that in the future. … We’ve got to get it fixed,” England said.

Extend North Slope drilling season

He also urged people to seek ways of extending the North Slope exploration drilling season with a review of the criteria for the tundra travel opening date. He said that FEX supported ideas for state or federal staging areas in remote areas, to enable equipment to be stored close to exploration areas during the summer.

“That could be a joint federal and state initiative, and we’ve had some discussion in that regard,” England said.

Regulatory process too cumbersome

England also criticized the regulatory process for North Slope operations as lengthy, repetitious and expensive. People must find ways of reducing the redundancy involved in doing multiple environmental assessments in the same area year after year. Multi-year permitting might provide one solution, he suggested.

From the state’s perspective, the crucial question was how to stem the decline in oil production, England said: “We need to drill a lot more exploration wells on the North Slope to even have a chance to offset that decline.”

Still bullish on NPR-A

England emphasized that FEX and Petro-Canada remained bullish on the prospects for oil and gas development in NPR-A.

“We’re taking a long-term view to developing our subsurface knowledge and our experience in building in our second operating season,” England said. “… We are developing good partnerships with the North Slope Borough stakeholders and we hope that will help us bring future development. … We have 157 people out in the field right now.”

England ended his January 2007 presentation with a photograph of the Cape Simpson oil seep on the Beaufort Sea coast of NPR-A.

“It’s still there and it’s massive,” he said. “… There is the potential for massive deposits untapped … out in NPR-A, but we need to drill a whole bunch more wells to find them.”

Hints 2006-07 drilling success

In early March 2007 there were rumors of FEX hauling truckloads of crude from the Aklaqyaaq No. 1 well.

Unfortunately for all companies drilling exploration wells on Alaska’s North Slope, the weather once again interfered with scheduling. Most exploration programs got under way in February, not December or January.

The first official word from FEX on its drilling results came March 1, 2007, from top executives in Calgary to analysts.

This is part of what they had to say:

Q: Progress in Alaska?

A: Talisman CEO Jim Buckee: “I think there are six or seven wells drilling up there (referring to work of all operators) and we all spud approximately the same time in mid-February ... the weather conditions affect everybody. Now that we’ve started drilling, though, the operation’s been going very well. ...We have seen some uphole gas. Hydrocarbons are not a problem.”

Q: P-50 reserve potential for the three Alaska prospects?

A: Executive Vice President of Exploration John ‘t Hart: “Yeah, actually Aklaqyaaq could be the biggest … but Jim is quite correct in the hundreds of millions of barrels for a P-50 (median reserve potential) number, is the ... right number, but a significant upside to these numbers.”

Q: On Alaska what is the lead time for these fields going onstream?

A: Ronald J. Eckhardt, executive vice president, North American operations: “In Alaska the timeline’s pretty long ... very, very best — you know miraculous — would be 2012; I think 2014 — 13, 14 is probably better.”

Hits in several formations

In May 2007, Talisman had more to say, this time in a press release and an interview with Petroleum News.

All three of the wells FEX drilled in NPR-A in 2007 encountered hydrocarbon-bearing sandstones in several formations, Talisman said.

One well — Amaguq No. 2 — was plugged and abandoned and the other two wells — Aklaqyaaq No. 1 and Aklaq No. 6 — were suspended, Talisman said.

Although weather conditions did not allow enough time to test the three wells — or the well and sidetrack that FEX had drilled the previous winter — the “initial estimate of contingent resources present” in the formations of the two 2007 suspended wells wa

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Advice for Alaska, U.S. governments

When asked if he had any advice for Alaska Gov. Sarah Palin and the federal government that owns much of the acreage in the National Petroleum Reserve-Alaska, Talisman Energy executive Tim England said if the governor wants to see continued investment in Alaska, the state should maintain fiscal stability and provide “regular, unencumbered access to lands.” Both are very important to Talisman Energy’s Alaska subsidiary, FEX L.P., he said Oct. 10.

“For the federal government, royalty relief for marginal projects and lease extension provisions need to be ratified for BLM lands, which are challenged by their remote and harsh operating environment,” England said.

England is senior manager of global new ventures for FEX’s parent, Calgary-based Talisman.