Time for Pikka
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Santos’ Gallagher talks low emissions, 19% IRR, sell-down not critical
On Aug. 16, Santos Ltd. and its joint venture partner Repsol took a final investment decision to proceed with the US$2.6 billion Phase 1 of their Pikka development project on Alaska’s North Slope. First oil is expected in 2026 with a daily gross of 80,000 barrels a day.
Santos, an oil and gas producer based in Adelaide, South Australia, said Phase 1 has 2P recoverable reserves of 397 million barrels gross. A recent Wood Mackenzie report on the entire Pikka unit puts that number at 768 million barrels.
Santos anticipates an IRR from Pikka Phase 1 of about 19% at less than $60 long-term oil price, and a life cycle breakeven oil price of around $40 per barrel, including carbon pricing.
In a parallel press release on Aug. 16, Repsol said full development of Phase 1 “will consist of 45 wells to be drilled from a single well pad, using industry-leading technology to reduce the environmental footprint, with associated midstream facilities including a production facility, operating center, seawater treatment plant, and pipelines.”
The Pikka unit is onshore, near existing infrastructure, and on state, not federal leases.
Six months ago Santos was talking about selling a 15% stake in the Pikka project.
On May 22, The Australian Business Review’s DataRoom column reported that major North America oil and gas producers were “believed to be lining up in the sale process for a stake” in Pikka.
DataRoom editor Bridget Carter wrote: “In the process of the Moelis-advised competition are understood to be major US energy heavyweights” such as ConocoPhillips, ExxonMobil and Chevron.
Nearing the development stage in 2019, Oil Search Ltd., prior to its December 2021 sale to Santos, said it was interested in selling a 15% stake in Pikka and surrounding acreage to a third party. It is common practice on the North Slope to have at least three partners on large oil and gas projects.
At that time Repsol had not expressed interest in selling any of its interest, but it had an agreement with Oil Search to leave the Australian company in control of operating Pikka, regardless of ownership percentages. Later, Repsol said it would be open to a 15% sale of its stake in Pikka, which is west of the central North Slope.
But in Repsol’s recent press release it didn’t mention anything about selling any of its interest; a follow-up call to a company media representative yielded no information on the subject.
As it turned out Santos CEO Kevin Gallagher told participants in a half-year earnings conference call on Aug. 16 that although it had been “unable to agree on an equity sell down to date, with strong supply contracts and the project in an excellent state of readiness, we feel now is the time to monetize this exciting opportunity and are happy to move it forward.”
Similar to what the company had done with its Barossa gas project, “we may yet sell down before first production. We do not need to wait and delay our investment decision and risk a loss in value for Santos shareholders,” Gallagher said.
Later in the Q&A portion of the conference call when he was asked to “clarify Santos’ sell-down aspirations” going forward and whether the process has “now concluded for the time being,” Gallagher said Santos wasn’t waiting.
“We don't think we have to wait to develop this project for other folks that have been interested in the project - and good interest in the project. But as I said in my speech, we’ve been unable to get anything agreed in the time frame to date. And we do know that others see value in Pikka, but we think it is a project that will become more valuable over time. And we think now is the time to develop it. We talked a lot about how the world has changed over the last six months. And as I said, we don’t need to wait and sell down before we can move it forward. But we’re still open to sell down during the development phase, just like we did on the Barossa project, where we sold down to JERA after FID.”
In regard to how the world has changed in the last six month since a previous Santos conference call, Gallagher said energy security is now a major issue due to the invasion of Ukraine.
Gallagher upbeat on ConocoPhillipsWhen asked about the potential of working with ConocoPhillips on Pikka development “now that Willow looks like it’s … moving forward with the environmental aspects of that project potentially getting approved,” Gallagher said “absolutely.”
“I think Conoco is an excellent operator. I have worked with them over many years, I always made the point that they have a strong safety culture, a strong operational culture. We will want to work with Conoco … hopefully, that can be beneficial for both parties. And indeed, they will benefit from our oil in that pipeline, as you know, is that will lower the tariff for everybody as it’s volume based.
“We’re looking forward to working with Conoco and the other operators in the region. I was up there recently, and you’re right, if Willow goes ahead, there's going to be a lot of activity and the most activity that has been there in quite some time,” Gallagher said.
Praises Alaska employeesOperator Oil Search (Alaska), a Santos company, holds a 51% working interest in the Pikka unit; Repsol has a 49% interest (see related Repsol story in this issue of Petroleum News).
Santos is focused on local procurement and local employment as part of the project, with 98% of current employees living in Alaska. Phase 1 of the project is expected to create more than 500 jobs and construction of the project will deliver approximately 2,600 jobs.
In addressing the work Santos has undertaken since taking over Oil Search’s Alaska assets, including the Pikka unit and the Alaska office in Anchorage, Gallagher said the “in country” team in Alaska has led the work with oversight from Santos in Australia.
“Capex has come down a little bit. But I would say that the main work we’ve done over the last sort of a year or so or six months … has really been in contracting and getting the right contracts … getting ready to do the project and de-risking the project. I think a lot of the work was excellent.
“But again, it’s the team in country that has led most of that work. … I spent a bit of time over there with some of our team recently, met all the local stakeholders, the indigenous stakeholders, governor, senators, federal senators and we’ve got a lot of support for the project.”
Gallagher described the Oil Search (Alaska) team as “world class. … I've been very impressed by the team that Bruce (Dingeman) has assembled in country with very … Alaska experienced individuals making up that team. And I’m sure they’re very happy today with this announcement, as I know they’ve been anxious for some time now, but a great team in country, a great asset, low-risk asset - as I say, it’s mainly a drilling project. Now the majority of the civil works is done.”
Gallagher also noted that “we’ve spent six months assuring and linking them to the corporate center so that we’ve got that governance across the operations and building the connection between the team in country with the corporate body back here in Australia.”
Low emissions project“Pikka Phase 1 represents one of the lowest-cost and lowest unabated emissions intensity new oil projects in the region,” Santos said in its Aug. 16 press release.
Taking FID on Pikka Phase 1 is “consistent with Santos’ goal of achieving net-zero (scope 1 and 2, equity share) by 2040.”
The company said it is committed to delivering a net-zero project (scope 1 and 2, equity share) and has entered into memorandums of understanding with Alaska Native corporations to deliver carbon offset projects, including a strategic alliance with ASRC Energy Services, a wholly owned subsidiary of Arctic Slope Regional Corp., or ASRC, on leading technology development for carbon solutions in the Arctic.
Santos also noted in its press release that Pikka development is also supported by other key stakeholders, including the state of Alaska, the North Slope Borough and the landowner company Kuukpik Corp.
One of those supporters is U.S. Sen. Dan Sullivan, R-Alaska, who issued the following statement welcoming Santos’ Pikka announcement: “It’s exciting to see this project, which has been in the works since I was serving as Alaska’s Department of Natural Resources Commissioner, finally come to fruition,” he said Aug. 16. “Today’s announcement is great news for energy security, national security, and for economic and community development, including thousands of jobs for Alaskans, in our state where we have the highest environmental standards in the world.”
Contracting strategyFinally, when asked about the contracting strategy and risk for Alaska, Gallagher said: “One of the things I would say is that on all our projects I conducted a review a few months back of our contracting strategies, looking at which countries a lot of our contracts were with, and that was really in response to the invasion of Ukraine. I was trying to understand what risks we had in terms of anything being manufactured or fabricated in Ukraine - you’d be surprised how much comes from that part of the world or nearby countries where gas might be cut off to those countries and our supply chain be impacted.
“So we’ve reviewed that. We’ve looked at China and the Chinese exposure for contracting and other parts of Asia. One of the things that makes me feel very comfortable about Alaska is that 89% of the spend … is within North America. … There's very little contracting outside of the U.S. … There is no Russian content.
“Around about 55% or so of the cost on this project would be fixed rate. And the remaining 45% or so is mostly labor costs. … So I think we include close to 10% contingency on this project.
“It’s a relatively low-risk project because we don’t have any of those huge plants, like an LNG plant or offshore vessel components to the project. It’s now really … a drilling project with some processing kit, which makes it a relatively low-risk project. So it’s more about the days it takes to drill wells as opposed to the rates,” Gallagher said.