A joint venture operated by Brooks Range Petroleum Corp. is working to develop new financing or to possibly find new partners in order to bring its Mustang development project into production, preferably before a key deadline arrives at the end of the year.
Most of the modules for the Mustang Operations Center No. 1 processing facility at the North Slope development have been completed and are currently being stored in the United States and Canada, according to a recent project update from the Alaska Industrial Development and Export Authority. But the oil company needs to secure more financing in order to finish constructing the center and to begin drilling new development wells.
According to the largest owner of the Mustang project, the joint venture recently “re-optimized” the project to account for persistently low oil prices. “This re-optimization included delaying the drilling of development wells and water injectors until oil production commenced and could be financed from cash flow rather than from debt or equity prior to the commencement of full production,” Independent Non-Executive Chairman Ravinder Singh Grewal and then-Executive Director and CEO Dean Lloyd Gallegos wrote in an April 12, 2017, annual report for Alpha Energy Holdings Ltd.
In the report, Grewal and Gallegos noted that the joint venture was unlikely to resume drilling activities before the second half of 2017. They also noted that before drilling can resume, construction of the Mustang Operations Center must resume. According to the annual report, the joint venture is obligated to acquire the operations center by April 1, 2018, and “is currently in discussions with financial institutions in respect to this acquisition and additional funding to recommence and complete the MOC construction.”
According to Alpha Energy, all long lead-time modules have been built. Construction on the facilities is approximately 40 percent completed, with some $85 million spent to date.
The company also noted that it had re-classified its Alaska tax credits in financial filings to account for uncertainty over budget negotiations and potential gubernatorial vetoes.
The Mustang project is the first development planned for the Southern Miluveach unit, which is located on state land at the western edge of the central North Slope.
Upcoming deadline
In addition to financial pressure, Brooks Range Petroleum is facing regulatory pressures.
Under its current terms, the Southern Miluveach unit will expire at the end of this year unless Brooks Range Petroleum begins production, proves that one of its previous wells is capable of producing economically or convinces the state to grant an extension.
The Southern Miluveach unit was originally set to expire on March 31, 2016. At that time, the state Division of Oil and Gas agreed to extend the terms until the end of 2017, in order to give the company time to resolve the geologic problems it had encountered.
In its most recent plan of development for the Southern Miluveach unit, submitted in late September 2016, Brooks Range Petroleum proposed a plan of work for bringing the Mustang field online by the end of this year. The plan called for installing cross-country pipelines, pipeline tie-ins and on-pad piles in the first half of 2017. The company expected to finish building its modules by July 2017 - installing the Alaska-built modules between April and September and the Canadian modules between August and October - and resume development drilling during the fourth quarter, with first oil in December.
In a late November 2016 decision approving the new plan of development, Acting Division of Oil and Gas Director James B. Beckham wrote, “While BRPC has committed to development activities that could result in production, the Division remains concerned that BRPC will be successful in completing these activities during the 4th (Plan of Development) period. BRPC has set forth a schedule to achieve first oil by December 2017. Based on the materials BRPC provided, it appears possible for BRPC to meet this deadline. But the schedule is extremely tight and leaves little room for deviation.”
Beckham also referenced a private technical conference where Brooks Range Petroleum officials “identified two particularly critical milestones: completing the Alpine tie-in by end of the winter season and completing third party studies regarding Kuparuk C sands.”
Beckham noted that in filings accompanying its plan of development, Brooks Range Petroleum said it “will be reluctant to return to any drilling at SMU” without those third party studies. But at the conference, company officials said they might drill the first three wells before the studies were complete. During the conference, the company also “described financial hurdles” as it pursued the work described in its plan of development.
The concerns of the division were “particularly acute,” according to Beckham, because of the upcoming unit expiration at the end of the year. To save the unit from expiration, Brooks Range Petroleum would need to begin production or drill a well that the state certifies as capable of producing in paying quantities, Beckham wrote. Alternately, the company would need to propose and get state approval for a new plan of exploration.
“The Division would like to see BRPC succeed with SMU,” he wrote. “But the tight schedule, impending unit expiration, and concerns BRPC has raised with technical issues and financing cause the Division to question the likelihood of success.” Even with those concerns, he approved the plan because it “set forth a possible path toward production.”
In its annual report, Alpha Energy acknowledged the deadline for bringing Mustang into production by the end of the year. But, the company also noted, “the Alaskan State laws, however, contain certain provisions which allow the Group to seek approval for the renewal of the term prior to its expiration or rectify the default over a cure period.”
Ups and downs
The Mustang project has some unique advantages and challenges.
A March 2017 report from DeGolyer and MacNaughton estimated that the Mustang field contained some 20.8 million gross barrels of 1P reserves, with an estimated 30 percent recovery rate. The report also estimated 2P reserves of 33.3 million barrels at 35 percent recovery and 3P reserves of 38.1 million barrels at 40 percent recovery for the field.
While those figures are relatively small by the standards of existing North Slope developments and recent North Slope discoveries, they are sizable given the location of the field. The Southern Miluveach unit is adjacent to the southeastern boundary of the Kuparuk River unit, making it only about 650 feet from the Alpine Oil Pipeline.
With help from the Alaska Industrial Development and Export Authority, Brooks Range Petroleum has already built a 4.3-mile gravel access road and a 17-acre drilling pad. The public corporation was also an important financier for the Mustang Operations Center.
The road and the eventual processing center were designed to be pieces of regional infrastructure. With other potential development projects nearby, particularly the Placer development operated by ASRC Exploration LLC, the Mustang facilities are well positioned to serve other operators and potential earn revenue through facility sharing.
But the strategic location of the Southern Miluveach unit is offset by the complexity of its geology. The proved reserves at Mustang are contained in 11 fault blocks. The current plan calls for drilling horizontal producers into each of the blocks and vertical injectors.
The geology presented a challenge for Brooks Range Petroleum during the first attempt at development. The company drilled three development wells at Mustang in 2015.
The program started with the SMU No. 2 (Lipizzan) well in early 2015. The well reached target depth and was completed and cased as planned, according to Alpha Energy.
The second well, SMU No. 3 (Shamrock) also reached target depth. But while surface casing was successful, shale and sand incursion from higher-than-expected pressures prevented the company from installing intermediate casing. The company plugged the well back to the surface casing with the plan of reuse the top of the wellbore at a future date.
In June 2015, the company tried to use the surface and intermediate portions of the SMU No. 1 (Mustang lateral) well to drill a 5,800-foot horizontal lateral for production. But underground pressure prevented the company from being able to complete the project.
The disappointing results of the program forced Brooks Range Petroleum to launch a review of its operations, leading to a decision to upgrade drilling equipment.
In the exploration phase of the project, Brooks Range Petroleum drilled the North Tarn No. 1 well and No. 1A sidetrack and the Mustang No. 1 well at the field. According to the Alpha Energy annual report, the company cased and plugged those vertical wells in such a way as to accommodate future re-entry, with the idea of potentially returning at some point to drill horizontal sections from the wells to accommodate oil production.
Ownership
When Brooks Range Petroleum announced the Mustang discovery in early 2012, company officials said they likely needed help bringing the field into production.
Help arrived in mid-2014, when JK E&P Group Pte. Ltd., Thyssen Petroleum North Slope Development LLC and MEP Alaska LLC acquired BRPC and a package of North Slope properties from Alaska Venture Capital Group and Ramshorn Investments Inc. for $450 million. Today, JK E&P subsidiary Caracol Petroleum LLC owns a 50 percent interest in Brooks Range Petroleum, TP North Slope Development LLC owns a 32.5 percent interest and MEP Alaska LLC owns a 15 percent interest. (The remaining 2.5 percent is unaccounted for in the Alaska corporations database, as of early May.)
Additional financial help came from AIDEA, which partly financed two infrastructure ventures at the unit in return for an interest in the leases at the Southern Miluveach unit.
Brooks Range Petroleum operates the unit on behalf of seven working interest owners: Caracol Petroleum LLC (36.28 percent), TP North Slope Development LLC (22.46 percent), AIDEA-subsidiary Mustang Operations Center 1 LLC (20 percent), MEP Alaska LLC (10.37 percent), Ramshorn Investment Inc. (6.08 percent), Alaska Venture Capital Group LLC (3.82 percent) and AIDEA-subsidiary Mustang Road LLC (1 percent).
Caracol Petroleum is a wholly owned subsidiary of JK North Slope LLC, which is in turn a wholly owned subsidiary of JK North Slope Group Inc Srl. JK North Slope Group is a wholly owned subsidiary of JK E&P Group Pte Ltd., which is in turn a wholly owned subsidiary of Alpha Energy Holdings Ltd. The parent companies are based in Singapore.
Although based in Singapore, the companies have a connection to Alaska.
Alpha Energy appointed Dean Gallegos to be its chief financial officer in September 2014 and promoted him to executive director and chief executive officer in January 2016.
Gallegos previously worked for the Australian independent Buccaneer Energy Ltd., which operated a range of exploration and development projects throughout the Cook Inlet region before filing for bankruptcy protection in mid-2014, about seven months after Gallegos left the company, according to his biography. Buccaneer also partnered with AIDEA on infrastructure financing, particularly the acquisition of a jack-up rig.
According to a recent press release from Alpha Energy, Gallegos resigned his position as head of Alpha Energy on May 3, 2017, with an effective date in early August 2017.
