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Vol. 19, No. 46 Week of November 16, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

The Producers 2014: BRPC charts a unique path to oil development

The independent is using public financing for infrastructure and a private joint venture to at Mustang

Eric Lidji

For Petroleum News

The Alaska Venture Capital Group became one of the most active exploration companies in Alaska over the past decade by assembling joint ventures of small independent players.

Now, the company is taking a similar approach to development.

Earlier this year, AVCG LLC and its partner Ramshorn Investments Inc. sold a 90 percent stake in their Alaska holdings, and 100 percent interest in their operating arm Brooks Range Petroleum Corp., to a three-company consortium for $450 million.

Thyssen Petroleum North Slope Development LLC, JK Tech Holdings Ltd. and MEP Alaska LLC acquired the North Slope assets for $100 million in cash and a commitment to spend more than $350 million on an initial development program at the Mustang field.

The program includes construction of a 15,000-barrel per day processing facility at the Southern Miluveach unit oil field, and three production wells to be drilled later this year.

Brooks Range Petroleum has previously said that it is aiming to bring Mustang online at a rate between 8,000 to 10,000 bpd sometime in the first quarter of 2016.

Although focused initially on Mustang, the deal also includes exploration prospects in the AVCG portfolio, including the Tofkat unit and Kachemach unit between the Kuparuk River unit and the Colville River, the Beechey Point unit north of Prudhoe Bay and a package of leases on the eastern North Slope near the Savant-operated Badami unit.

An AVCG affiliate Brooks Range Development Corp. (an entity distinct from the operating arm Brooks Range Petroleum Corp.) will retain some of its position.

As of Sept. 4, AVCG and Ramshorn held some 86,621.91 acres of state leases and Brooks Range Development Corp. held some 10,373 acres, according to a state database.

A new joint venture

The deal brings together a diverse group of players from around the world.

Thyssen Petroleum North Slope Development LLC is a subsidiary of Thyssen Petroleum LLC, a privately owned oil and gas exploration company based in the British Virgin Islands, with offices in Monaco and Houston and operations in the U.S. Gulf Coast.

The chairman of the company, a Swiss national named Baron Lorne Thyssen-Bornemisza, “heads a family business with investments in the entertainment industry in California, agriculture in Pakistan and is a major shareholder in IHS, the critical information provider to the oil and gas industry,” according to a company website.

“Alaska attracted us because it remains a world-class hydrocarbon basin with considerable untapped potential, near existing infrastructure and because the Parnell Administration has created a very attractive investment climate for independent oil and gas companies,” Thyssen Petroleum CEO Hamid Jourabchi said in a statement.

The Singapore-based technology company JK Tech Holdings Ltd. was founded in 1990 to provide products and services to businesses, schools and governments in the country.

But in April 2014, the company announced plans to expand into the oil and gas sector by partnering with SF Ventures Pte. Ltd. and Ezion Holdings Ltd. Through the deal, JK Tech Holdings issued 13 million shares to SF Ventures and 42 million shares to Ezion, and created a wholly owned oil and gas subsidiary called JK E&P Group Pte. Ltd.

Ezion Holdings is already an active investor in Alaska.

In 2011, the Singapore-based marine company Ezion partnered with Buccaneer Energy Ltd. and AIDEA to acquire a jack-up rig for use in shallow offshore waters of Alaska, particularly in Cook Inlet. Earlier this year, Buccaneer sold its stake in the Endeavour jack-up rig to Teras Investments Pte Ltd, a wholly owned subsidiary of Ezion.

In May 2014, AIDEA and the Ezion affiliate CES Oil Services Pte. Ltd. partnered to fund a nearly $225 million oil processing facility to support operations at the Mustang field.

The third partner in the deal, MEP Alaska LLC, is a newly created subsidiary of Magnum Energy Partners LLC, a relatively new exploration company based out of New York City.

An active independent

Long-time oilmen Bart Armfield and John Jay “Bo” Darrah Jr. formed AVCG in 1999.

It was among the first independent oil companies to come to Alaska looking to develop the sizeable oil fields passed over during the first decades of North Slope development.

AVCG struggled in its early years to find partners to fund exploration work and to negotiate access agreements with existing facility operators on the North Slope.

That changed in 2004, when the company formed an operating arm called Brooks Range Petroleum Corp. Over the subsequent years, AVCG established a multi-party joint venture that became among the most prolific exploration companies on the North Slope.

Through various iterations, the joint venture pursued targets at the current Beechey Point and Tofkat units. But in 2010, the companies farmed-in a group of six Eni Petroleum leases along the western edge of the Kuparuk River unit called the North Tarn prospect.

Brooks Range Petroleum eventually formed the 8,960-acre Southern Miluveach unit around five leases in the area and began calling the prospect the Mustang field.

Over the 2011 and 2012 exploration seasons, Brooks Range Petroleum drilled the North Tarn No. 1 exploration well, the North Tarn No. 1-A sidetrack and the Mustang No. 1 delineation well. The wells tested the Brookian formation and deeper Kuparuk formation. During that time, Brooks Range Petroleum also merged its seismic data with data purchased from ConocoPhillips to consolidate some 570 square miles of 3-D seismic.

Prior to the program, Brooks Range Petroleum estimated that the Brookian might contain some 35 million barrels of oil and that the Kuparuk might contain an additional 6 million barrels of oil. Given the notoriously tricky geology of the Brookian, the company put its bets on the Kuparuk, believing that the smaller accumulation would be the most economic and technical feasible. But the exploration work proved a discovery in the range of 40 million barrels of recoverable oil from the Kuparuk - bigger than expected.

An independent audit by the global consulting firm DeGolyer and MacNaughton lent credence to those figures. The firm estimated that the Mustang prospect contained proved (or P1) gross reserves of 24.7 million barrels of recoverable oil. The firm also estimated that the Mustang field contained 43.6 million barrels of proved and probable (or P2) reserves and 51 million barrels of proved, probable and possible (or P3) reserves.

That convinced Brooks Range Petroleum to move toward development.

The wells encountered oil shows in the Brookian sands that were of “lower permeability than anticipated,” according to Brooks Range Petroleum. The company said it would study ways to develop the formation, including fracture stimulating long horizontal wells or recompleting depleted Kuparuk production wells into the Brookian using horizontals. The company also said that it wanted to explore a potential extension of the Kuparuk formation to the northwest called Appaloosa that could add reserves and field life.

Looking for partners

The discovery was “bigger than us … bigger than both of us,” Alaska Venture Capital Group lead managing member Ken Thompson told Petroleum News in April 2012, referring both to AVCG and its partner Nabors-subsidiary Ramshorn Investments Inc.

The joint venture hired Tudor, Pickering, Holt & Co. to assess strategic options, which included two primary strategies. The first was to have an investor fund all the development costs needed to bring Mustang online, at which point oil sales could fund operations until the company completed an initial public offering. The second was to find a producer willing to invest in return for a majority stake in the business.

But, at the time, Thompson mentioned that the company would prefer a cash-based bonus up front with a commitment to fund the program going forward, which is pretty much what the two companies got through the recent sale to the three-company consortium.

AVCG also took a parallel strategy, involving the public sector.

Alongside those efforts to find private sector partners for Mustang, AVCG and Ramshorn also pursued and obtained public investment in their project through AIDEA.

In late 2012, AIDEA loaned the company $20 million toward a $25 million infrastructure project. The project included a winter ice road, a gravel mine, a 19.3-acre gravel production pad, a 0.7-mile access road from the mine to the pad and a 4.4-mile open access road from the pad to the existing road system at the nearby Kuparuk River unit.

AIDEA funded the program through a newly created joint venture company, Mustang Road LLC. The deal gave AIDEA an 8 percent rate of return over 15 years and made Mustang Road LLC a 1 percent working interest owner in the Southern Miluveach unit.

Earlier this year, AIDEA and Ezion affiliate CES Oil Services Pte. Ltd. formed Mustang Operations Center 1 LLC to finance a $200 million to $225 million processing facility at the Mustang field. The deal included up to $50 million in AIDEA investment and a commitment from CES Oil Services to provide $1 million in equity funding and arrange for the Mauritius-based Strategic Equipment Inc. to loan the remaining $175 million.

Like the earlier partnership, the deal gave Mustang Operations Center 1 a 20 percent working interest in Mustang. The working interest stake would be adjusted annually. The working interest allows the joint venture to benefit from state tax credits for exploration.

According to information AIDEA provided when it agreed to invest in the processing facility, Brooks Range Petroleum would drill 11 production wells and 20 injections wells in five phases occurring over a three-to-four-year period. The production wells would have 11,000-foot to 22,000-foot vertical sections with 5,000-foot horizontal laterals.

The first phase of the development would have two horizontal producers, one vertical natural gas injector and four vertical water injectors. The second and third phases of development would each have two horizontal producers and four vertical water injectors. The fourth phase would have two horizontal producers and two vertical water injectors. The fifth phase would have three horizontal producers and five vertical water injectors.

In a plan of development for Southern Miluveach filed with the state in October 2013, Brooks Range Petroleum mentioned plans for 13 horizontal producers, up to 21 vertical water injectors and one gas injector. The plan said the pad would accommodate 38 wells.

The new facility would connect to the Alpine Pipeline, which is a mere 700 feet away, and carry oil across the existing North Slope network to the trans-Alaska oil pipeline.

AIDEA said that it invested in the project because it saw the potential to increase North Slope oil production and to add a range of temporary and permanent jobs. But AIDEA and AVCG also saw the potential to build a facility that could be useful to other explorers with leases in the region, including Repsol E&P USA Inc. and ASRC Exploration LLC.

“We view the Mustang development as an anchor position that can be expanded with (exploration) success in the immediate area,” Armfield told the Commonwealth North Energy Action Coalition in June 2014. He said that early plans considered a 7,500 bpd facility to accommodate only early Mustang production, but that the company increased the proposed capacity to accommodate additional production in the future. “If we need to increase the size of the facility, that’s a great problem to have,” he added.

Economic spectrum

With full development, the cost of the project is approaching $700 million.

That includes some $250 million for the pad, road and processing facility, $350 million for the first phase of development drilling and the funds already spent on exploration. Given those costs, and the costs going forward for future phases of development, Armfield said the project needed oil prices in the range of $80 to $120 per barrel for the project to be economic. “Within that spectrum we think this is a viable project,” he said.

The prevailing value of Alaska North Slope oil delivered to West Coast markets has been within that spectrum for the past four years, according to the Department of Revenue.



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