Armstrong takes over

Repsol backs away from North Slope program to focus on Talisman acquisition

ERIC LIDJI

For Petroleum News

Just when it seemed as though Repsol E&P USA Inc. might be nearing the finishing line of its multi-year exploration campaign in the Colville River Delta, the company has announced a major shuffle with a minority partner and cancelled upcoming drilling plans.

In a deal worth more than $800 million, a subsidiary of the Spanish major is transferring significant working interest in its North Slope holdings to Armstrong Oil & Gas Inc.

If fully executed, the deal would make Armstrong the operator and majority owner of a proposed development program in the Colville River Delta and more than 750,000 acres of jointly held exploration acreage extending across much of the central North Slope.

Armstrong had held a 45 percent interest in the exploration acreage and a 30 percent interest in the development acreage. Following the restructuring, Armstrong now holds a 75 percent interest and operatorship in the exploration acreage and a 45 percent interest in the development acreage with an option to acquire another 6 percent and operatorship.

The announcement came the same day the Alaska Department of Natural Resources began taking comments on a two-to-three-well drilling program Repsol had been permitting at its development acreage for this coming winter. While Repsol and Armstrong have said they are “in the early stages of developing their new discoveries” in the region, the companies have indefinitely deferred those upcoming drilling plans.

The deal allows Repsol to pursue a new strategic plan following its acquisition of Talisman Energy Inc. and allows Armstrong to focus on its “core strengths” of developing shallow, conventional oil fields identified through 3-D seismic surveys and exploration drilling, according to an Oct. 13 press release from the two companies.

Approaching development

Whereas most plans of exploration describe work to be completed over the set period of time, the proposed plan of exploration Repsol included with its unit application included three wells completed in early 2015, several months before the state approved the unit.

To compensate, Division of Oil and Gas Director Corri Feige approved the unit but required Repsol to submit a second plan of exploration by October 2015 outlining work commitments for the coming year. While Petroleum News was unable to determine by press time whether or not Repsol actually submitted this second plan of exploration, the company had begun permitting a two-well exploration program at the Pikka unit.

According to filings released Oct. 13, the program would have focused on a small area within the Colville River Delta, with one drill site to be located on an existing island and another less than a mile upland to the east. Repsol had planned to use two rigs to drill Qugruk No. 501 on ADL 391322 and Qugruk No. 701 on ADL 391454. The company was also holding out the possibility of drilling one or two sidetracks at each of these wells, as it has done in previous seasons. And the company said it might use previous permitting work to conduct additional drilling at its existing Qugruk No. 801 well site.

The program would have included construction of two temporary ice pads, approximately 40 miles of temporary ice roads and a temporary ice staging area, ice camp and ice airstrip. The companies expect the work deferral to eliminate some 500 jobs this winter.

Although Repsol described the program as being exploratory in nature, circumstantial evidence suggests that the work might have contained some development components.

Through four previous seasons, Repsol had drilled 16 wells across its North Slope acreage, with much of the activity focused across its holdings in the Colville River Delta.

While the company remained fairly quiet about the results of its activities, small hints and clues along the way suggested a major discovery. In January 2014, as the company was in the middle of its third exploration season, Repsol Alaska Project Manager Bill Hardham described development as an inevitability. “I feel confident it’s coming. It’s not a matter of if, but when,” Hardham said, adding that regulations and taxation were the primary obstacles. That May, after the drilling season was over, Chief Financial Officer Miguel Martinez announced “positive results” from the three-well program and said the company was “working toward defining the most economical way to develop the area.”

And in November 2014, Armstrong Oil & Gas Vice President Ed Kerr told Petroleum News, “In 10 or 15 years people will talk about Repsol the same way they talk about BP and ConocoPhillips today, in terms of … contributing to Alaska’s economy.”

In May 2015, after completing its fourth exploration season, Repsol described the results of its drilling campaign as “better-than-expected” and committed to conducting a fifth exploration season. As far as a sanctioning a development, though, the company said it needed to continue evaluating drilling results and would make a decision in early 2016.

Shifting strategies

With its portfolio heavily weighted toward Africa and South Africa, Repsol took a different approach over the past decade. In a four-year plan announced in early 2008, the company decided to realign its portfolio to favor oil production in developed countries. A series of geopolitical events including an uprising in Libya, international sanctions in Iran and nationalization in Argentina greatly supported the thinking behind that strategic shift.

The new strategy made Alaska attractive.

Repsol partnered with Shell and Eni on a block of federal leases in the Beaufort Sea in 2007 but lawsuits delayed and ultimately ended a proposed exploration campaign. The company also won leases in the Chukchi Sea in early 2008 but never proposed activities.

Even with those two bold moves, Repsol “turned down several opportunities to come in further into Alaska, largely because of the uncompetitive tax structure,” Hardham said in 2014. But in March 2011, before state lawmakers had approved changes to the production tax code, Repsol acquired a 70 percent working interest in North Slope leases held by the Armstrong Oil & Gas subsidiary 70 & 148 LLC and its fellow Denver-based independent GMT Exploration LLC. The joint venture covered 494,211 acres in the White Hills region south of the Kuparuk River unit and near the Oooguruk unit.

The $768 million deal earmarked some $750 million for exploration, according to Petroleum News sources, suggesting that all three parties were eager to develop.

When Repsol acquired its current North Slope holdings in March 2011, the prevailing value of Alaska North Slope crude oil was $115.34 per barrel, according to the Alaska Department of Revenue. In September 2015, the prevailing value was $48.83 per barrel.

All about economics

This past summer, the partners provided their first detailed results from their exploration program. According to Armstrong, the two wells completed earlier this year and two wells from previous seasons had targeted the Alpine formation at the “East Alpine” field.

Those four wells “encountered oil productive Alpine sand in excess of 95 feet thick at a depth of 6500 feet with porosities ranging from 15 percent to 25 percent. Well control and seismic data indicates the oil pool covers an area in excess of 15,000 acres.”

Another seven wells in the “Nanushuk reservoir” had “proven an oil pool that covers more than 25,000 acres, at a depth of 4,100 feet, with an oil column of 650-plus feet, and up to 150 feet of net pay with an average porosity of 22 percent.” While the companies said they needed more wells to “confirm the ultimate size of some discoveries, this season’s results justify moving forward with development,” according to Armstrong, which said the companies were permitting developments in the Nanushuk and Alpine.

All 16 wells drilled over the past four seasons found oil and most found oil in multiple zones, Armstrong said in its recent restructuring announcement. The company also provided the results of a third-party report from the engineering firm DeGolyer and MacNaughton estimating “C1” reserves of 497 million barrels of oil, “C2” reserves of 1,438 million barrels and “C3” reserves of 3,758 million barrels. The report uses “contingent” reserve classifications, which Armstrong said would be converted to more traditional Proven, Probable, and Possible figures “where appropriate upon the final investment decision.”

The region where Repsol has been exploring between the Kuparuk River unit and Colville River unit is often called the “billion-dollar fairway” because it is nestled between the second and third largest oil fields on the North Slope, near infrastructure.

Speaking to KTUU television, Alaska Department of Natural Resources Commissioner Mark Myers said Repsol and Armstrong had made “an amazing discovery,” which he said might be the biggest on the North Slope since ARCO Alaska discovered Alpine.

According to Armstrong, even with the deferment, permitting will continue on a three-pad development with estimated production on the order of 120,000 barrels per day. If correct, such a program would significant boost existing North Slope production rates, which has averaged some 515,000 barrels per day in October, according to the state.