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The Explorers 2021: Oil Search rises to Alaska, market challenges
Bruce Dingeman: On track to deliver first oil in 2025, company has conveyor belt of opportunities that go well beyond Pikka Phase 1 Kay Cashman Petroleum News
On March 19, 2021, Bruce Dingeman, president of Oil Search Alaska, summarized the accomplishments of Oil Search since it officially entered the state in early 2018 with regulatory approval of its partial purchase and option on Armstrong Energy JV’s interest in the Pikka and Horseshoe area leases west of the central North Slope, becoming a partner with Repsol in the process.
Within months, Oil Search took over operatorship of the leases. At the time of acquisition, Oil Search said the deal was made based on some 500 million barrels of recoverable oil, noting Armstrong’s rough estimate was more than 1 billion barrels.
The ASX-listed publicly traded parent Oil Search Ltd. of Sydney, Australia, told analysts it paid $400 million for a 25.5% interest in the Pikka unit and adjacent exploration acreage and a 37.5% interest in the Horseshoe block and the Hue shale.
Oil Search had the option (which it took), exercisable until June 30, 2019, to purchase all the Armstrong JV’s remaining interest in the Pikka unit and the Horseshoe block (another 25.5% and 37.5% respectively) as well as an additional 25.5% interest in adjacent exploration acreage and 37.5% in the Hue shale.
In March 2021, the percentages have changed with Oil Search generally holding 51% and Repsol 49% and the partners looking for a third partner that sources say would result in Oil Search and Repsol each holding 35% and a new partner 30%.
Seven holes in 3 years Back to March 19, 2021, and Dingeman’s presentation at the Meet Alaska virtual conference, in which he covered OSA’s first three years in Alaska.
“We’ve drilled seven holes to date in the three years we have been operator,” he said.
Parent Oil Search Ltd. is 90 years old with a market cap of AUS$9 billion, Dingeman said.
Pikka Phase 1 is just the start, he said, with “additional phases from Pikka and other acreage. We have a conveyor belt of opportunities that go well beyond our initial Phase 1.”
Currently, “we have about 125 employees and 25 contract staff in Alaska and we’ll increase those numbers as our project progresses. We’ve grown from three staff in early 2018 to about 150 now,” Dingeman told Meet Alaska’s virtual attendees.
“During last winter’s drilling and civil program we had about 1,000 people at the peak of that activity, spread across 18 camps. Our team has deep Alaska experience and capability to deliver a major project of this scope,” he said.
Oil Search’s land position is “material and it includes both near-term development assets and longer-dated exploration opportunities,” Dingeman said.
First drilling season Oil Search’s first North Slope winter drilling season was the 2018-19 season, most of which took place in early 2019.
“We drilled four penetrations then, a lot of which were successful. It was also a key point in getting federal regulatory approval with the U.S. Army Corps of Engineers. And we actually incorporated 26 modifications to that permit application in sensitivity and response to the feedback from the local community. We also reached the landmark land use agreement … with Kuukpik and then we got approval from the North Slope Borough for our master plan which includes rezoning and allowed us to begin plans for our civil work,” Dingeman said.
Winter 2019-20 season
Moving up to the 2020 winter season, which is technically referred to as the 2019-20 season, and Oil Search’s last active winter drilling season to date, the company “completed three additional wells, or penetrations, all of which were also successful and then entered into our large civil works program,” Dingeman said.
Oil Search received its permit for inclusion of a seawater treatment plant as part of its project development plan.
“At that point we also shifted through a recycle effort to a new phased development concept,” he said.
In recapping 2020, Dingeman said: “We had excellent and outstanding support from the contractor community, both securing gravel from an ASRC pit and a (North Slope) borough pit to complete that activity. We put down over 2.3 million cubic yards of gravel - our main Spine Road, three pads, 200-foot bridge and a whole lot of culvert, so it was a huge program. We had a truck running every 60 to 90 seconds for almost the entirety of the 90-day period to complete that work.”
COVID-19 “really took hold and the price downturn followed that. Early last year (2020) we realized that our former concept wasn’t going to work,” Dingeman said. “So, we went through a recycle process to get costs down and make it more resilient to, for low oil prices. That re-design work was largely completed during 2020.”
And from it, Oil Search switched to a phased development plan for Pikka, in which the first phase would provide the cash needed for subsequent phases.
Finally, he said, the three penetrations OSA drilled in early 2020 resulted in two new discoveries. Those penetrations were in the Mitquq and Stirrup prospects and they “really unlocked significant running room beyond our core Pikka asset.”
In late 2020, Oil Search had a significant write-up of its resource base by an independent, third party auditor, per parent Oil Search Ltd.’s Nov. 18, 2020, ASX filing that reported the Oil Search/Repsol joint venture’s 2C contingent resource increased by 33%, taking it from 728 million barrels of oil to 968 million barrels - and putting it 93% higher than at asset acquisition in 2018 (see chart in the pdf and print versions of this story).
And those numbers do not include the Stirrup and Mitquq discoveries, which have not yet been appraised.
FEED entry for Pikka
“So, we’re starting to make our way up from base camp (see graphic of mountains near start of this story in the pdf and print versions) and we’re approaching FEED, or front-end engineering and design, entry,” Dingeman said.
In February 2021, Oil Search and its partner Repsol formally announced FEED entry.
“It was covered here locally, at Petroleum New as well as globally at Upstream and I think Oil and Gas Journal and other publications. It was really a huge milestone for us, especially considering the difficult environment we find ourselves in,” he said.
“To me it is really a testimony to the quality of our project. The feedback we’ve gotten from both our shareholders and the feedback from the press and other stakeholders has really been very good.”
Pikka project scope
Initially, three drill sites were part of the $6 billion Nanushuk Development - ND-A, ND-B and ND-C.
The new phased development plan involves one drill site, Dingeman said.
Previously OSA was looking at a $6 billion project. “We’ve skinnied that down to about $3 billion, pursuing a single drill site,” he said. “But, more importantly, we’ve looked at value engineering and changing our concept to squeeze further costs out of it while maximizing recovery and production benefits. That’s resulted in us being able to lower our breakeven costs from $45 to sub-$40 (per barrel). This includes a 10% rate of return in that number, so that makes it more resilient to the lower price environment that we find ourselves in.”
Dingeman said there are “other attributes that are beneficial with this change. We went from a large sealift solution for our processing facility to a modularized standardized solution for that processing kit.”
That means it “can be sourced in a way that it can be transported by road instead of sealift, so it takes us out of that seasonality window,” giving Oil Search “more flexibility in level loading our work as we progress the project. We feel we have eliminated some execution risks as a consequence,” Dingeman said.
The rest of 2021
“So that’s where we’ve been,” he said. “I’d like to pivot now to where are we going. We’re part way up the mountain, so we’re going to press ahead now to that FID point … or project sanction … later this year,” FID being the final investment decision.
In his March 19, 2021, Meet Alaska presentation Dingeman addressed what Oil Search would be doing at Pikka in the coming months, expecting the FID to happen at the end of 2021.
Phase 1 involves a single drill site, ND-B, and a 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.
Construction is expected to begin after FID in late 2021, which will likely be preceded by the equity sell-down of 30%, with Oil Search remaining the operator per a previous agreement between it and Repsol.
As Dingeman indicated, Oil Search is well positioned to proceed, having completed a significant construction effort in 2020, including pads for the Pikka ND-B 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.
The company’s plans include 43 wells from ND-B.
“It’s only a 20-acre pad so we’re really being conscious of our footprint,” Dingeman said, noting the wells are oriented towards the northwest, going out to under the Colville.”
The seawater treatment plant at Oliktok Point, “included in our scope … includes nano filtration technology with sulphate removal. This provides the high quality water that meets our needs in a reliable, low-risk and cost-efficient way because we really have demanding waterflood needs in terms of water quality and production efficiency.”
Oil Search’s “design approach allows for subsequent phases to be built on” the 80,000-barrel-a-day facility, “so we’re not cannibalizing any of the future benefits by taking this phased approach,” Dingeman said.
Key milestones to FID
Second quarter 2021, Dingeman said, “is really about completing the detailed progress engineering work and progressing that. It’s about preparing implementation plans, getting the contracts ready to be able to execute at approval of FID, and then preparing all the work for our internal controls and economics.”
Third quarter, he said, “includes finalizing the case for our internal partner funding approvals, and … we’ve got a number of assurance reviews just to make sure it meets our quality standards, and that we’ve identified all the key risks and appropriately satisfied all the preconditions necessary so that it’s appropriate to proceed to FID.”
Dingeman also talked about regulatory approvals: “Our state regulatory approvals are routine, and we really need your help to assure they remain that way. This is especially important given that all of our oil and gas development opportunities are to the benefit of Alaska’s economy.”
Partnership, Dingeman said, “is in our company DNA. We know that we can’t succeed on our own and we’ll all win if we work together to deliver this project. We really need your support to receive these timely regulatory approvals, and we’re confident that together we can coordinate our activities for multiple projects, all for Alaska’s benefit and success.”
“Assuming we meet all our preconditions for FID, we’ll take sanction in the fourth quarter.”
Stakeholders, Arctic Stakeholder alignment is an important factor in getting final sanction approval from Sydney, Dingeman said.
“This isn’t just internal with our partner Repsol, this is to make sure we are aligned with the needs of the community, the borough, the state - all key stakeholders that have interactions with our project,” he said.
Prior to Dingeman’s Meet Alaska presentation the most recent news on Pikka came from an investor briefing and two ASX filings, followed by a Feb. 22, 2021, Petroleum News interview with parent Oil Search Ltd.’s top executive Keiran Wulff, formerly president of the Alaska business unit.
Oil Search’s focus will continue to be 100% on state versus federal lands in Alaska, he said.
If Pikka was in any 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,” he said.
For the upcoming divesture, Wulff 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 (in buying into the JV) because it is a conventional project, and it has a low-cost series of additional growth options.”
Wulff said Repsol and Oil Search’s 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 2021, he said: “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 (2021),” Wulff said.
“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.
He pointed out that 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.
Small enviro footprint Wulff 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.
Phase 1 contracting “We have a busy year ahead of us, but we feel we’re really on the right path to make this a big success,” Dingeman said.
The US$3 billion gross cost commitment for Phase 1 of Pikka is “roughly two-thirds facilities and construction and about one-third around the wells. … We will be spending about three-quarter of that $3 billion prior to first oil” in 2025, he noted.
Down the road With Oil Search and its partners Repsol and Armstrong together and separately holding hundreds of thousands of acres on the North Slope, company executives have good reason to talk about a conveyor belt of oil prospects that could be developed in the future.
It appears their next project after Pikka will be a standalone development of Horseshoe/Stirrup.
Another prospect mentioned by company executives has been Grizzly, south and east of Horseshoe.
One of the other prospects named by Oil Search execs is far to the east - the 195,200-acre block Armstrong picked up in the November 2018 State of Alaska oil and gas lease sale under the name Lagniappe Alaska. It is south east of Prudhoe Bay and has only been lightly explored by seismic or drilling.
In exercising its option under the partners’ area of mutual interest agreement, Oil Search took over operatorship of the Lagniappe block, purchasing a 50% interest from Lagniappe, a 100% owned Armstrong company for approximately $8 million.
“We’re trying to continue to make the play that we discovered to the west, the Nanushuk at Pikka,” Bill Armstrong told Petroleum News Jan. 30, 2019, about the Lagniappe leases, although not naming the analogous, lookalike formation.
“It is a very subtle play; that’s why it has been hidden for so long; it doesn’t just jump out at you on seismic. … The amount of running room this concept has is just massive in Alaska. ConocoPhillips is chasing it west, which is great, and we like what they are doing a lot, but going east from Pikka we also see the same thing. We’re really excited. It’s still a wildcat play. It still has risk, but it has huge potential,” he said.
“Every well that has been drilled in the surrounding area has indications of hydrocarbons. So, what little well control there is very encouraging.”
In addition to the Nanushuk lookalikes, Armstrong sees “a whole other idea that has never been chased that we like but is nothing like the Nanushuk. Yet, it too is exciting and wild and wide open,” he said.
The block of leases has since grown with subsequent acquisitions of adjacent acreage and there are rumors the partners might begin exploration of the area in the winter of 2022.
“There are so many zones, so many objectives out there on the North Slope that could work. You chase one thing and find another. So many discoveries have been found by accident,” Armstrong said.
For example, “we were pursing the Alpine and Kuparuk at Pikka and the Nanushuk was just a secondary objective, yet it was the one that worked the best - although the Kuparuk and Alpine worked too,” he said.
“It’s hard to believe that in this day and age … a play like this - Nanushuk - could lie essentially unexplored: onshore, shallow oil, near infrastructure with massive room to run and in, of all places, the United States. Who would have guessed?”
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