Providing coverage of Alaska and northern Canada's oil and gas industry
November 2022

Vol. 27, No.48 Week of November 27, 2022

Jade’s timing tight

Big banks still call Alaska O&G un-investable, but private money seems interested

Kay Cashman

Petroleum News

As reported in last week’s Petroleum News, Jade Energy LLC is looking to drill a development well in its Sourdough prospect in first quarter 2024. Operator Jade holds a 100% working interest in the tract.

The company filed its fifth plan of development for ADL 343112 Area F, Tract 32, in the eastern North Slope’s Point Thomson unit with the Alaska Department of Natural Resources’ Division of Oil and Gas on Nov. 1. The POD period runs from Jan. 1 through Dec. 31, 2023.

In its Nov. 1 filing, Jade said that in the last few weeks investors who had suspended interest in Sourdough development due to things such as the Biden administration’s hostility to the oil and gas industry, have once again expressed interest in the project - “if we can demonstrate that the program is commercially viable.”

Unfortunately, according to 2020 modeling conducted by Jade (with feedback from DNR), the project has a negative Net-Present Value, or NPV, for the full program expected to approach $1 billion dollars.

In analyzing the POD filing and reviewing previous Petroleum News reports, there are three major obstacles to Jade’s 2024 drilling plans:

1. The 40% net profit share leases, or NPSL, burden on ADL 343112, which can only be changed by legislation.

2. Hilcorp hasn’t transferred the Development Account Balance to Jade, estimated to be approximately $150 million.

3. Royalty relief (Jade is filing for royalty relief with the Division of Oil and Gas in the next two weeks or so).

Legislation needs to be passed to give DNR the authority to reduce the 40% NPSL burden on ADL 34311. Such a bill passed the Alaska House in 2022 but became mired in the Senate Finance committee, so with a new two-year Legislature beginning sometime in first quarter 2023, Jade and its supporters will have to start over. In the last session Alaska Gov. Mike Dunleavy led the charge to get the bill introduced and passed.

It’s unclear why Hilcorp has not yet transferred the Development Account Balance to Jade, which it seemingly should have done in July 2022. Delaying hurts Sourdough economics and Jade’s chances with its investors. The funds can’t be used until after Sourdough production begins but having the Development Account Balance (thought to be in the neighborhood of $150 million) will mitigate future tax liability for the project and thus materially improve the economics, the NPV, of the Area F, Tract 32 Sourdough Development Project.

Another thing that would help would be if oil reserves could be added. According to a 2018 seismic program, some 40% of Tract 32 reserves fall within ExxonMobil leases. Those additional reserves would materially improve the economics of Sourdough, but under the current arrangement, ExxonMobil indicated it would only transfer additional resources to Jade following a successful initial drilling campaign, and not before.

According to the fifth POD, signed by North Slope geologist and entrepreneur Erik Opstad, the transformation from a noncommercial to a commercial Sourdough Development Project is only possible if some combination of the above occurs.

Drilling targets

Tract 32 holds two of the mid-1990s Brookian oil discovery wells, Sourdough 2 and 3. BP drilled the 12,562-foot Sourdough No. 2 well in March 1994 and the 12,475-foot Sourdough No. 3 well in March 1996.

In its fifth POD, Jade noted that Brookian reservoirs have been encountered by “numerous wells” drilled in and near the Point Thomson unit since the 1970s, including BP’s two Sourdough discovery wells, which the major estimated held 100 million barrels of recoverable oil.

On the currently suspended Sourdough 3 well, initial BP well testing offered 2,700 barrels of oil per day from a stimulated vertical well, but Opstad told PN he expected that a 5,000-foot horizonal completion would produce significantly more than that.

Economic enhancement

The first 10 months of the fourth POD in 2022 were challenging as a series of unprecedented events such as supply chain problems, inflation, sky-rocketing interest rates and more prompted Jade to modify its initial POD activities on the fly.

A number of tasks that were planned and expected to be worked were either postponed or only partially completed. This caused Jade to change its priorities several times to pursue other tasks that were less impacted by external events that were largely out of Jades control.

These tasks included the following:

1. Working on federal polar bear related permitting.

2. Obtained a revised third-party reserve study from Petrotechnical Resources Alaska, evaluating the implications offered by PRA’s new Reserves & Economics Report.

3. Working with Worley to generate a preliminary facility design and construction cost estimate (FEED).

4. Got input from DNR to update the Sourdough development project economic model (issued 08-09-2022).

5. Secured an additional 5% working interest from Hilcorp (approved by Division of Oil and Gas on 12-28-2021).

6. Working to secure a Development Account Balance transfer from Hilcorp (DNR & Hilcorp).

7. Working with legislative representatives to modify the 40% NPSL burden currently carried by the Jade lease.

8. Working on a royalty modification request to DNR.

9. Jade working with Schlumberger and Halliburton on the design of its first horizontal development well.

10. Confirm that dredging of the PTU pier approach was not currently required to support rig mobilization.

As the company transitions to the last 60 days of the fourth POD Jade is focused on three elements that have emerged as key to advancing the program short-term ahead of the fifth POD that will run from Jan. 1, 2023, through Dec. 31, 2023. In no particular ranking, these elements are:

1. Development model,

2. Royalty reduction,

3. Well design.

Development modeling, royalties

The development model “has become significant because everyone has some vested interest in what the model is telling us,” Jade said in its Nov. 1 POD filing.

In particular, Jade wants to avoid starting a project that in the long run has no chance of being profitable.

The state appears to share that concern for all North Slope projects.

Approval of royalty relief for Jade by DNR is of course dependent on the commercial model.

Then the potential investors also want to understand the long-term profitability profile for an Area F development.

“Since parties interested in participating in an Area-F Development have only reappeared in the last few weeks after nearly a year of disinterest, Jade has a sense of urgency to get the model whipped into shape ASAP,” Jade said Nov. 1.

“Tangential to modelling, is royalty reduction. Thus far, the models run by Jade of resulted in a negative NPV suggesting that the nearly $1 billion dollar project is not commercial. That said, some of the model runs have produced results that are close to offering a positive NPV. One scenario that is helpful is to reduce the standard 12.5% royalty to say 5%, but then tie that reduction to an oil price schedule so that the reduction becomes less as the price of ANS crude rises above an agreed benchmark,” Jade said.

“Since investors want to see proactive actions from the operator to enhance the economics of any project, and there are established procedures submitting a formal application for royalty reduction to the state, Jade elected to make reduction of the standard 12.5% royalty on the ADL343112 lease another focus during the final 60 days of the 4th POD,” the company said Nov. 1.

Well design

Well design is the third element that Jade is focusing on to close-out the fourth POD. This element gains special attention largely due to a change in Jade’s focus early in 2022.

During the first through third PODS, design for a Jade 1 appraisal well was nothing more than a simple throw way pilot hole. As the true cost of remote operations east of the Point Thomson unit’s Central Pad started to emerge, both Jade and its potential Sourdough Development Project investors began to question the economic viability of a throw way pilot hole.

“Although we still needed to drill a pilot hole deeper than either existing Sourdough wells (SD2 & SD3) to evaluate potential additional reserves atop the Hue Shale … it didn't make financial sense to plug and abandon that wellbore,” Jade said.

Rather, the company decided to change the well design “whereby we would plugback from the pilot hole TD, then complete the well as a horizontal sidetrack.”

Although more expensive than an abandoned pilot hole, this plan makes better use of the capital and was quickly embraced by our investor community,” Jade said.

“Further to this subject, Hilcorp’s recent suggestion that a similar workover and horizonal sidetrack completion of Sourdough 3 (drilled by BP but not classified by BP as a discovery well) might also add considerable value to the drilling program. We haven't looked at this suggestion in any detail yet, but it is certainly a potential task for the 5th POD and one that we have already worked on a preliminary basis,” Jade said Nov. 1.

The above discussion of Jade’s planned activities spanning the last 60 days of 2022 closes-out the fourth POD.

2023 activities

For the fifth POD Jade hopes for a seamless transition from the 2022 activities, leaving it with “a fairly short list of tasks” that should take it to drilling in first or second quarter 2024.

These tasks are:

1. Royalty and tax reduction

2. Funding

3. Well planning

4. Rig selection

5. Permit to drill

6. Mobilization

Royalty and tax reduction mean not just the application for royalty reduction, but also the 40% net profit share burden on ADL 343112 and the Development Account Balance transfer to Jade from Hilcorp.

“There is universal recognition that to ensure that development of the Sourdough reservoir is economic, Jade needs to reduce the level of taxation, demonstrate that it can legitimately increase the reserve basis in its economic model or somehow materially reduce development costs,” Jade said.

“Preferably, Jade can deliver some benefit to all of these elements. As a result, Jade intends to work these issues throughout 2023,” the company said Nov. 1.

In regard to funding, “everyone will agree that oil and gas operations in Alaska are absurdly expensive when compared with most other onshore venues. Fortunately, these ridiculous costs can occasionally be offset by the financial rewards that can come from the development of outsize Alaskan reserves,” Jade said.

“Unfortunately, such reserves are uncommon, but the State of Alaska financial framework is largely structured around these rare elephants, which discourages many independents from entering the market at all, because it is so expensive to conduct business in the state,” Jade said.

Jade said it typically divides well costs into three phases - administrative, materials and equipment acquisition and drilling operations.

As of the end of 2022, Jade said it was in the administrative fund raising phase that by way of example includes the items listed below, required as part of permitting and planning to get the bit turning right:

• Permit application review fees: $11,059

• Permitting labor costs: $49,000

• Field study costs: $37,000

• Administrative labor costs: $15,000

• lce pad lease rental: $4869

• Bonds, insurance and guaranty: $800,000

• COFR total premium $381,948.3

“So more or less we have nearly $1.8M exposed just for permitting, planning, bonding/insurance & fees! At the moment, Jade is working to fund this phase of the program,” the company said.

Given the intent to drill a horizontal production well rather than just an exploration test, Jade can work on finalizing its plan to drill a pilot hole to the Hue Shale at ~12,547 feet MD, then plugback and sidetrack to a 5000-foot horizontal well.

Rig selection

“Selection of a Sourdough rig is largely driven by the pressure gradient that is roughly 0.7 psi/ft. That gradient equates to reservoir pressures between 8k and 9k PSI,” Jade said.

“This means that any rig used for Sourdough drilling must be able to deploy BOPE rated for 10,000 psi,” Jade said.

Unfortunately, there are only a few rigs in Alaska that can be so equipped.

“Assuming that funding can be put in place, the Jade 1 drilling campaign is now planned for Q1/Q2 2024. Currently plans on utilizing a medium sized mono-body rig like Nordic Rig-3 or perhaps a slightly larger rig like Nabors 27E that has drilled several deeper wells at Point Thomson,” Jade said.

Weighing in at some 2.8 million pounds, Nordic Rig-3 is a “challenging barge load,” but once landed the rig moves quickly along ice roads and arrives ready to drill with little additional rig-up work required. With its own secondary containment, the rig “presents and environmentally friendly package, particularly when underlaid by a Polystar ™ berm system, which is Jade policy,” Jade said.

The rig features a split pipe shed that allows casing to be run on one side and drill pipe run on the opposite side. Automated pipe handling equipment raises and lowers tubulars into either side of the pipe shed. Capable of standing back 16,000 feet of 4-inch drill pipe and hoisting 464,000 pounds the rig is “well-suited for medium depth appraisal well programs such as Jade 1,” Jade said.

For “completeness” the company is also looking at several modular rigs that could be transported to the Jade 1 drill site entirely by snow road.

Rig selection will be made based on drilling requirements as dictated by the final well design, the company said in its Nov. 1 POD filing.

Private money

Jade initially intended to file the Jade 1 permit to drill, or PTD, during the fourth POD period, but in 2022 funding was simply unavailable, so there was no point in filing a PTD the company didn't have the money to drill (~$40-million).

Although the big banks are still calling the Alaska oil and gas industry “un-investable” the situation with private money seems to have changed.

Several investors have been in touch with Jade expressing interest in the Sourdough Development Project.

Given that interest, Jade hopes to fund the first well early in 2024. That will require that the well design be finalized by mid-summer and the PTD filed no later than Thanksgiving 2023.

That will lead into the last task planned under the fifth POD, mobilization.

Last task, mobilization

Execution of this task is also dependent on Jade securing the required funding, the company said in its fifth POD.

“Mobilization of a rig and its heavy equipment is one of the more challenging elements of any well plan and this one is no different. Most drilling programs on the North Slope access their drill site by ice or gravel roads, but gravel is not expected to be available during the early phase of the Sourdough Development Project,” Jade said.

Consequently the company has two primary options available to it: “We can barge between West Dock and the PTU Service Pier to the mix as an intermediate step. This conveyance expects to stage necessary equipment such as a drilling rig, support equipment, some additional materials and expendables as required to support drilling operations. All will be staged into a laydown area already designated by the PTU. Barging operations would occur in the summer of 2023.”

The second mobilization option available to Jade is “mobilization overland by snow or ice road. Jade routinely supplies USLD and pre-mixed drilling mud to its rigs operating on remote sites by snow road and it expects to do the same for the Jade 1 site in the PTU,” the company said.

Mobilization by snow road could occur either during winter 2023 or winter 2024 depending on the nature of the loads, Jade said.

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