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The Explorers 2020: Oil Search leads in hunt for the Nanushuk
Company operates some of the most promising Alaska North Slope acreage with Nanushuk reservoirs; its Stirrup 1 exploration well one of best in play Kay Cashman Petroleum News
Even though Oil Search does not have any exploration wells planned for the 2020-21 North Slope winter drilling season due to uncertain market conditions, the independent’s Stirrup 1 exploration well drilled in the previous winter season has one of the highest flow rates of any Nanushuk single-stage stimulation of a vertical well on the North Slope to date, the company said April 21, 2020.
Approximately 7-1/2 miles west of the 2017 Horseshoe 1 discovery well and almost 28 miles southwest of Oil Search’s proposed Pikka unit development, the Stirrup 1 well successfully penetrated the Nanushuk reservoir and encountered an oil column with a net pay of 75 feet.
The wellbore was cored, perforated through a single-stage simulation and shut-in for six days to enable pressure build up prior to testing in which it flowed at a stabilized rate of 3,520 barrels of oil per day, exceeding company expectations.
While further appraisal will be required, Stirrup is a direct analogue to the Horseshoe Nanushuk discovery and as such the company said the new find could underpin a possible standalone Horseshoe development. Or, it could represent a low cost tie-back option to the Pikka development
Mitquq exceeds expectations The other exploration wells drilled the same winter were the Mitquq 1 and its sidetrack Mitquq 1 ST1 - its flow test also exceeding Oil Search’s expectations.
After discovering oil in the primary Nanushuk reservoir, the Mitquq 1 well was drilled into the secondary Alpine C formation objective where it encountered 52 feet of net hydrocarbon pay, comprising 31 feet of net oil pay and 21 feet of net gas pay. A comprehensive suite of wireline logs, pressure data and hydrocarbon samples were collected prior to the wellbore being plugged back to allow for the drilling of a sidetrack, Mitquq 1 ST1, to appraise the Mitquq 1 Nanushuk discovery.
The sidetrack intersected the Nanushuk formation and encountered approximately 172 feet of net hydrocarbon pay, including a 29-foot gas cap.
The wellbore was logged and cored and in late March a flow test was conducted with a single-stage stimulation. The test included a clean-up, flow period and a six-day pressure build-up, with the well achieving a stabilized rate of 1,730 bpd.
Located 5.6 miles east of the proposed central processing facility for the Pikka unit development, Oil Search describes the Mitquq prospect as a “high value tieback” to future Pikka infrastructure.
The exploration wells were successfully plugged and abandoned as planned, with the rigs and crews safely demobilized from the site, concluding Oil Search’s second North Slope drilling program.
Reducing breakeven cost Due to the decline in oil prices and COVID-19 concerns, the company delayed its final investment decision on Pikka unit development. Expected in the second half of 2020, the FID has been deferred until there is “improvement in market conditions,” per Oil Search.
The additional time “will allow further value engineering and optimization of the development to take place, with a focus on reducing the breakeven of the project and the results of the Mitquq and Stirrup wells to be integrated into future planning,” Oil Search said April 21, 2020.
In February 2020, Oil Search began a company-wide strategic review to re-evaluate its long-term vision, strategic focus and pathway for delivering superior shareholder returns. Given the troubling market conditions, the firm’s short-term focus was on stabilization, resulting in cost cutting, US$700 million in capital-raising and lowering the cost of development.
The result of those actions, Managing Director Keiran Wulff said July 1, 2020, would ensure Oil Search’s long-term survival.
He also noted that “good progress is being made to reduce the breakeven cost of the Pikka unit development.”
Outside Alaska Oil Search lowered its production cost guidance for 2020 to around $10.50 per barrel of oil equivalent before one-off restructuring costs, down from its previous guidance of $12.48 per boe in 2019. This, however, did not apply to Alaska, as the company does not currently have any North Slope production.
“The Pikka project was premised on a per barrel breakeven cost in the mid $40s,” Anchorage-based Amy Burnett, Oil Search’s manager of U.S. media and communications, later explained. “We are working to reduce the project breakeven cost to ensure the Pikka development is cost-competitive and commercially viable in a lower oil price environment.”
Some layoffs And although Oil Search halted its plans for limited early production of Pikka in 2022, choosing instead to concentrate on full field development to go online in 2025 with a 135,000-barrel facility, Alaska fared comparatively well in terms of layoffs.
The latest round of layoffs announced by Wulff on July 1, 2020, did not involve any Alaska workers.
However, some Oil Search workers were laid off in March and April.
“While seasonal contractors associated with our winter drilling and exploration programs represent the majority (of those March and April layoffs), we have reduced full-time (Alaska) employees by about 15%,” which brought the local total to 150 individuals, Burnett told Petroleum News.
All told, Wulff said full time employees will be reduced company-wide from 1,649 as of March 1, to 1,222, with a further 137 staff members to be transitioned out by the end of the year; none of those expected to be from Alaska.
“The painful decisions we have taken to optimize our organizational structure, enhance efficiencies and reduce operating costs have not been made lightly. They are the result of extensive studies aimed at ensuring we have an organizational structure that not only makes us more resilient to oil and gas price fluctuations but also embeds a culture of continuous improvement, operational excellence and strict fiscal discipline,” Wulff said.
Surrendered 140 leases The company also halted formal marketing activities related to its planned sell-down of a 15% interest in the Pikka area, although Oil Search said it is continuing discussions with “parties that had expressed interest prior to the oil price fall.”
On June 23, 2020, Oil Search relinquished 130 leases on Alaska’s North Slope to the Alaska Department of Natural Resources’ Division of Oil and Gas, which was acknowledged in a letter from Division Director Tom Stokes on July 9, 2020, who said the relinquishment takes effect on the filing date.
The surrendered acreage will be included in the next state North Slope and Beaufort Sea areawide lease sales; a date that has not yet been noticed, but the 2019 sales were jointly held in December.
The leases cut loose are “largely located on the edges of the company’s western lease area,” Burnett told Petroleum News July 15, 2020. “The reduction was in areas we have determined to be less prospective than other leases in our Alaska portfolio.”
“Even with the relinquishments, Oil Search continues to be among the top three leaseholders on Alaska’s North Slope,” she said.
Oil Search, not Repsol On June 17, 2020, Alaska’s Division of Oil and Gas posted the first amendment to the Pikka unit agreement from operator Oil Search. The amendment, filed June 1, leaves no doubt that Oil Search is the operator of the Pikka unit, not its partner Repsol E&P USA even though Oil Search will be farming out a 15% interest to a third party at some point in the future, leaving Repsol with the larger chunk of ownership.
A working interest owner in the North Slope unit, Oil Search filed the amendment on behalf of itself and the other unit working interest owner, Repsol. Although the initial agreement declared Oil Search the operator, mentions of Repsol being the operator still appears in random documents.
The June 1, 2020, amendment, which was signed by both Oil Search (Alaska) President Bruce Dingeman and Repsol (signature illegible), removes all doubt about which company is the operator. It also updates relevant addresses and reflects the current working interest ownership of the Pikka unit - Oil Search 51% and Repsol 49%.
The amendment was mailed to both Alaska Department of Natural Resources Commissioner Corri Feige and to Rex Rock Sr., president of Arctic Slope Regional Corp.
The North Slope Pikka unit was formed effective June 1, 2016, by then-working interest owner and operator Repsol, along with working interest owner Armstrong Oil & Gas subsidiary 70&148 LLC, which brought Repsol into the play, followed later by Oil Search.
DNR’s Division of Oil and Gas approved the first expansion of the Pikka unit on Nov. 29, 2016, and ASRC approved it on Feb. 28, 2017.
In a March 7, 2018, letter to DNR and ASRC, Oil Search was designated as successor unit operator in accordance with an article in the agreement.
DNR and ASRC approved the change in operatorship on March 20 and 21, respectively.
A revised Pikka unit operating agreement between the working interest owners was filed with DNR and ASRC on Oct. 9, 2019. Then, a revised Exhibit A was provided as an attachment to that revised operating agreement.
Pikka’s expected peak of 135,000 barrels per day does not include output from what is anticipated to be Oil Search’s next North Slope development from the nearby Horseshoe discovery.
Houseknecht: upended expectations The Nanushuk forms part of the Brookian sequence, the youngest and shallowest of the major North Slope petroleum bearing rock sequences. Although rocks of the Brookian are found across the entire North Slope, the Nanushuk is found mainly in the more westerly part of the region. (See full story in the May 31, 2020, issue of Petroleum News, titled “Exciting outlook.”)
Following the discoveries of the Prudhoe Bay and Kuparuk River fields in rock reservoirs much older and deeper than the Nanushuk, subsequent exploration mainly focused on these deeper rocks, with Brookian strata such as the Nanushuk generally being ignored.
Until that is 2015, when Armstrong took a contrarian view of conventional North Slope exploration strategies, brought in a well-heeled partner, Repsol, and made the Pikka discovery to the east of the Colville delta. That discovery upended expectations for potential oil volumes in the Brookian.
Although the COVID-19 pandemic brought an early end to the 2019-20 winter exploration season on the North Slope, there is continuing interest in oil discovery opportunities in the Nanushuk formation, the focus of major new developments at Pikka and Willow. While recent exploration drilling by Oil Search and ConocoPhillips is shedding further light on this intriguing new play, companies such as Armstrong, 88 Energy and Borealis Alaska Oil are also looking to test further opportunities of a similar character to the established finds.
The most recent major leasing activity was Armstrong’s purchase of a significant block of leases in the 2019 National Petroleum Reserve-Alaska lease sale, U.S. Geological Survey geologist Dave Houseknecht told Petroleum News in a May 2020 overview of Nanushuk exploration activity. Under Oil Search and Armstrong’s Alaska agreement, Oil Search has the right to acquire a 50% interest in the leases and to operate them, which is what has happened to date.
Pikka-Narwhal-Horseshoe trend There has been continuing exploration drilling along the trend of that original Pikka discovery. An oil discovery by the Horseshoe well, drilled in 2017 by Armstrong and Repsol to the south of Pikka, established what became referred to as the Pikka-Horseshoe trend, Houseknecht said. Evidence of pressure communication in the oil along this trend suggests the existence of an interconnected reservoir system.
Successful nearby exploration drilling by ConocoPhillips has resulted in what that company refers to as the Narwhal trend. USGS now refers to this complete system of discoveries and associated sand bodies as the Pikka-Narwhal-Horseshoe trend, Houseknecht said.
However, although Armstrong has indicated that an oil gravity gradient suggests that the reservoirs at Horseshoe and Pikka are in communication with each other, there has been no public statement regarding possible pressure communication between Horseshoe and the nearby Putu and Stony Hill exploration wells that enabled ConocoPhillips to identify its Narwhal trend, Houseknecht said.
And the possibility of reservoir communication between these various discoveries is intriguing, given the potential for significant complexities in lease unification, development strategies and the determination of resource ownership, he said. Moreover, with the likely need for hydraulic fracturing of the relatively low permeability reservoirs, there is the potential for pathways to open between adjacent reservoir rock bodies, Houseknecht commented.
Also, the shelf margins that form the reservoirs tend to be more separated to the south, while tending to converge to the north, thus leading to complex reservoir geometry, he added.
To the west of the Colville River delta, in the northeastern NPR-A, ConocoPhillips has been conducting drilling in its Willow and West Willow Nanushuk discoveries. In the 2019-20 winter season the company drilled two further appraisal wells (Tinmiaq wells), leading to a total of 12 wells in the discoveries and presumably meaning that the discoveries are now well delineated, Houseknecht said.
Publicly available information suggests recoverable oil volumes of 1,000 million to 1,500 million barrels in the Pikka-Narwhal-Horseshoe trend and 400 million to 750 million barrels in Willow and West Willow, he said.
Absence of water intriguing Regarding Oil Search’s 2019-20 winter drilling east of the Colville River, Houseknecht said the Mitquq well, to the east of Pikka, encountered oil both in the Nanushuk and in deeper Alpine sands, noting in the Nanushuk the well penetrated 29 feet of gas and 143 feet of oil, but no water.
The absence of water is intriguing, he said, suggesting that there could be a reasonably sized oil accumulation to the south, depending on how far the reservoir extends. Curiously, the well does not appear to be associated with any seismic amplitude anomaly depicted on Oil Search’s publicly published maps, Houseknecht pointed out.
The Stirrup well on the other hand, located west of the Horseshoe well and some distance southwest of Pikka, is at the northern end of a seismic anomaly that has appeared in an Oil Search publication. The Stirrup well also flowed oil from its Nanushuk target. Intriguingly, Houseknecht noted, Oil Search’s anomaly map for Stirrup overlaps with the northern end of an anomaly mapped by ConocoPhillips, raising questions regarding whether both anomalies represent a single reservoir, he said.
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