A year ago, Royale Energy Inc. hoped to resolve a legal dispute with a partner and resume plans to explicitly target North Slope source rocks sometime in early 2016.
While the San Diego-based independent resolved the legal dispute toward the end of 2015, the exploration campaign was delayed again, in part because of market conditions.
In September 2015, Royale announced that it had reached an agreement with former partner Rampart Alaska LLC to repurchase a 30 percent interest in a western block of leases. With the purchase, Royale once again owned 100 percent interest in its 96,000 acres on the North Slope and secured an exclusive right to proprietary seismic data.
In November, Royale sold its entire working interest in the western block - some 39,500 acres - to an un-named buyer for $2 million and was evaluating alternatives for the remaining 57,000 acres “including similar de-risking, sale or joint venture.” In late December 2015, the state approved a series of transactions where Rampart transferred its working interest in 20 leases south of Nuiqsut, between the Colville River and the Meltwater satellite of the Kuparuk River unit, to Royale, which in turn transferred the working interest in those same leases to the Armstrong subsidiary 70 & 148 LLC.
At the time, Royale described the sale as “a key step in its plan to strengthen its balance sheet and regain compliance with Nasdaq listing requirements.” Royale had previously received a letter from the Nasdaq listing qualifications staff notifying the company that it was non-compliant with the stockholders’ equity, majority independent director and audit committee requirements for continued listing. In January 2016, Royale announced plans to move to the Over-The-Counter QB, a “quality controlled segment of the OTC market.”
Seeking source rocks
As has been the case with other small independents in Alaska, Royale Energy arrived in the state with decades of institutional memory and a clear vision for its activities.
Royale Energy Vice President for Exploration and Production Mohamed Abdel-Rahman initially came to Alaska in the early 1980s, as a geologist for Sohio. He eventually became the company’s district geologist for the entire state. Among his assignment was working on a post-mortem investigation for the Mukluk well in Harrison Bay, which was the most expensive dry hole in history at the time. His research connected the “missing” oil at the Mukluk prospect with the prolific oil reservoir at the Kuparuk River field, which led to a larger theory about the nature and location of North Slope source rocks.
Although Royale would have preferred to create some “internal infrastructure” before acquiring a lease position in Alaska, circumstances dictated otherwise. After Great Bear Petroleum LLC took some 500,000 acres of source rock prospective acreage in an October 2010 lease sale, Royale sped up its plans. In December 2011, the company spent $2.7 million on nearly 100,000 acres of source rock prospective acreage in the Franklin Bluffs region, south of Kuparuk and south of Nuiqsut along the Colville River.
The company claimed that all three of its blocks were prospective for all three of the stack shale formations present beneath the North Slope: the Triassic-age Shublik formation, the Jurassic-age Kingak shale and the Cretaceous-age Hue, or HRZ, shale.
After a yearlong search for a joint venture partner, Royale signed an agreement with Australia-based Rampart Energy in early 2013. Rampart agreed to spend $43 million on exploration in return for a large stake in the Royale land position on the North Slope. The deal allowed Rampart to acquire between 10 percent and 75 percent working interest in the western block of leases and a 75 percent working interest in the Central Block by making various payments and funding various seismic programs by specific deadlines.
A 3-D seismic survey over a portion of the acreage identified a large conventional target and suggested the opportunity for a source rock exploration as well. The results convinced Rampart to commit $50 million to “conduct a regional, multi-year onshore oil and gas exploration drilling program during the winter months on the North Slope.”
An August 2014 oil discharge prevention and contingency plan for the Aki and Central Exploration Drilling Program covered exploration in two regions. The plan included eight potential well locations at the Aki prospect along the Colville River south of Nuiqsut and six potential well locations at the Central prospect south of the Kuparuk River unit.
In the document, Royale said that it intended to “drill up to four exploratory well locations during the two winter seasons between 2014 and 2015; with potential additional locations drilled within the lease blocks in future years.” The Aki and Central prospects have “both conventional and unconventional formations,” according to Royale.
The program never came to fruition. In late July 2014, Royale cancelled a contract with Kuukpik Drilling after its partner, Rampart Energy Inc., declined to fund a cash advance on the rig, according to the companies. After Royale cancelled the contract, Rampart launched an effort to find additional partners to help fund the program and said it wanted to perform additional technical work “to present the true potential of the opportunity to prospective industry and financial partners, and secure favorable commercial terms.”
By the end of the year, Royale and Rampart were unable to find a way forward, which led to claims and counterclaims. The legal challenges prevented the exploration program from occurring until early 2016, at the earliest. With the legal dispute only reaching a resolution toward the end of 2015, Royale was unable to coordinate a program this year.
