Nearing home stretch
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Pikka enters FEED w. year-round access; soft sounding for 3rd partner
An investor briefing and two ASX filings, followed by a Feb. 22 Petroleum News interview with Oil Search top executive Keiran Wulff, produced the following key updates to the company’s North Slope Pikka oil field development plans, including those for bringing in a third partner.
As anticipated, Pikka has entered the front-end engineering and design, or FEED, process for phase 1, involving a single drill site and production facility with an 80,000 barrel-a-day capacity that will begin producing oil by 2025 from the first major Nanushuk reservoir discovery on Alaska’s North Slope. Subsequent phases will be paid for by cash flow from phase 1.
Construction is expected to begin after a final investment decision in late 2021, which will likely be preceded by the equity sell-down of 30% by Oil Search and its partner Repsol that will leave operator Oil Search a 36% share.
Oil Search said it is “well positioned to proceed” having completed a “significant construction effort in 2020, including pads for the Pikka NDB drill site, production facility and operations center; a 192-foot bridge over the Miluveach River; and an 11.5-mile gravel road that allows year-round access from existing North Slope infrastructure to Pikka.
How sell-down will workWulff said Oil Search’s focus will continue to be 100% on state versus federal lands.
If Pikka was in any other jurisdiction other than the Arctic, it would be “one of the hottest projects on the planet … simply because of its proximity to infrastructure, its upside in resource, and the fact that it … has very, very strong environmental controls.”
For the upcoming divesture, he said, Pikka’s Arctic location for some companies means “it’s outside the bounds of where they’re looking at expanding … regardless of the quality of the project. Having said … that, we actually do have a number of companies who have maintained interest because it is a conventional project, and it has a low-cost series of additional growth options.”
Wulff said the partners’ agreement to jointly market a 30% interest will be “attractive to some of the larger companies.”
Or, he said, “we also each have an ability to independently market and divest our own 15% equity, which might be more attractive to smaller companies.”
But the “strong preference is that we’ll be marketing it together. We’ve set up joint teams. We’ve got a joint bank. We’ve got joint advisers. So, it’s very much a joint process at the moment,” Wulff said.
The process will start in March: “We wanted the conditions in America to settle down a little bit post the election and the Biden administration coming into office. So, we’re starting off with a series of soft soundings … with companies that have approached us and others that we think would be interested,”
A broader program will commence in April.
“The idea is for us to have indicative proposals around July, August, with a view for closing it off at FID at the end of the year.”
“Clearly, a sell down … would provide funding support. However, this is really a high-quality asset with a lot of growth. As for any sale, it has to make sense on a value perspective … for our shareholders,” Wulff said.
Major upside, resource potentialIn 2020 Oil Search had an independently certified increase in its Pikka 2C resource base to 968 million barrels, and that was before the two new discoveries - Mitquq, which is 6 miles from the proposed Pikka processing facility, and Stirrup to the south.
“These wells demonstrate the major upside and resource potential that exists in this field, and easy tie-in potential” to Pikka, he said, noting Stirrup “was recently rated one of the top 10 global discoveries in 2020.”
Wulff said the 1 billion barrel 2C resource will go higher once Stirrup and Mitquq are appraised.
In 2020, the company’s Alaska team, which is headed by Bruce Dingeman, president of Oil Search Alaska, “also completed and reviewed the development plan for Pikka with the aim to reduce breakeven, lower capital costs and increase IRRs without compromising full value. That was no easy feat,” Wulff said.
“The important point here is that the breakeven cost of all future developments will just continue to go down,” as more oil is found in the area.
Furthermore, the “sub $3 billion Pikka development, is fully costed, which includes facilities and drilling,” Wulff said.
“We’ve been able to lower our breakeven cost below $40 a barrel (Brent). … We’re very transparent with these … costs. They’re fully loaded, including financing with a 10% return on capital.”
Small footprint, Arctic experienceWulff also touts Pikka’s “very, very small footprint.”
“It’s actually sandwiched between existing facilities, ConocoPhillips at Kuparuk and the Alpine field to the west. We’re not in a remote area. We can tie into existing pipelines. … So, this is almost like an offshore development, where we’ll be drilling 50 wells from a small pad rather than whole series of wells spotted over the area,” he said.
“We genuinely have a world-class team in Alaska that has proven experience in the region. We targeted professionals with clear knowledge and were able to extract an amazing team as demonstrated by their performance to date,” Wulff said, noting most of Dingeman’s staff came from existing North Slope operators and many had leadership positions in those firms.