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The Explorers 2021: 88 Energy takes lead in hunt for Nanushuk Merlin well yields promising results, including new extensive interval, but snow road deterioration, operational issues prevent sampling of 2 prospective zones Kay Cashman Petroleum News
88 Energy Ltd. introduced a new exploration playbook for the winter of 2021 that is a game changer for the North Slope in terms of saving time and money and thus making Alaska more affordable for small-to-mid-sized operators.
The Australia independent drilled the Merlin 1 exploration well in its Peregrine project in the National Petroleum Reserve-Alaska on acreage acquired in a 2020 off‐market takeover of XCD Energy.
The Merlin well, whose main target was the prolific Nanushuk reservoir, was drilled by one of 88 Energy’s four Alaska operating subsidiaries, Emerald House - all the subsidiaries are run by long-time Alaska geologist and innovator Erik Opstad.
Opstad used All-American Rig 111, a lightweight, inexpensive portable rig that did not require an ice road for Merlin 1.
The shallower Nanushuk wells do not need the use of a rotary rig, or an ice road which is required to transport the heavier traditional North Slope exploration rigs.
Rig 111 was moved in pieces during the off-road winter season by tundra-safe track vehicles on snow trails.
Although the use of snow roads and lightweight, portable rigs has been studied and considered by XCD, Armstrong and Oil Search, 88 Energy was the first to conduct such a program on the North Slope.
Merlin 1 was spud March 10, 2021.
On March 22, 88 Energy reported that drilling had reached a depth of 1,512 feet, where surface casing was cemented in place and the blowout preventer system tested.
Following a successful formation integrity test, the rig continued to drill toward targets in the Nanushuk formation. The planned total depth for the well was 6,000 feet.
The Willow connection Merlin is considered a direct analogy to ConocoPhillips’ Willow oil discovery, while ConocoPhillips’ Harpoon prospect “is interpreted to lie on the same sequence boundaries as the Harrier prospect,” also in 88 Energy’s Peregrine project (see map in the pdf and print versions of this story).
Plans to drill a Harrier 1 well during the 2021 winter season were dropped by 88 Energy because of delays caused by a Biden Executive Order.
The Harrier and Merlin prospects lie between the Umiat oil field to the south and Willow and Harpoon to the north.
In its 2020 annual report, 88 Energy’s non-executive Chairman Michael Evans said March 9, 2021, that Merlin 1 was “targeting 645 million barrels of gross mean prospective resource.” Harrier 1, expected to be drilled in the winter 2022, will target a gross mean prospective resource of 417 million barrels.
A deeper Torok objective in the Harrier prospect lies at about 10,000 feet. As of April 12, 2021, 88 Energy has announced no plans to drill it.
An independent report for XCD that was generated by ERC Equipoise said Harrier Deep had a mean unrisked recoverable prospective resource of 572 million barrels.
About 500 feet thicker 88 Energy said March 29, 2021, that “interpretation of logging while drilling data indicates multiple potentially hydrocarbon bearing zones” were encountered in the Nanushuk formation.
The company further said March 31 that wireline logging was underway and that the Nanushuk formation was “encountered at ~600’ low to prognosis and is interpreted to be ~500’ thicker than that encountered in the wells drilled into the Willow oil field” analogue wells to the north of the Peregrine acreage. (Oil Search well Pikka B intersected the thickest Nanushuk reservoir seen in the area to date - some 350 feet of pay as compared to average thickness farther north in the Pikka unit of some 200 feet and 40 to 70 feet farther west at Willow.)
“Encouragingly, the gamma log indicates the presence of more sand packages than those in the analogue wells and … the sand packages in Merlin 1 are generally cleaner in nature. … Oil shows were recorded over multiple intervals in the Nanushuk while drilling, including the primary targets,” 88 Energy reported.
Fluorescence “ranged from relatively weak to moderate ‘dry’ … with slow to moderate sometimes fast streaming cut when exposed to solvent. Mud gas peaks were also recorded and, although generally not of the same scale of the increase in total gas above background as that seen in the analogue wells, one of the prospective horizons in Merlin 1 did have substantially elevated total gas, similar to that in the analogue wells,” the company said.
Heavier gas components, “including C5, were observed over multiple intervals,” 88 Energy said. “Resistivity was elevated over these intervals and is encouraging, particularly in the context that the Nanushuk is considered a low resistivity play type.”
Fluorescence, the company said, was also “observed in the drilling mud (‘pops’) accompanied by a petroliferous odor over three of the target intervals.”
“Significantly,” 88 Energy went on to say March 31, 2021, “one of these intervals is interpreted to be part of a potentially separate, sand package that is also present in the Harrier prospect.”
Beaten to a pulp Less exciting news came from 88 Energy on April 6 (the news popped in Alaska on April 5 because of the time difference between Perth and Alaska.)
Dr. Paul Craig, a veteran oil and gas investor in Alaska, told Petroleum News April 6 what other experienced North Slope operatives were only willing to say off the record about that news: Although “88 Energy stock got beaten to a pulp on the news about the Merlin 1 well. I like the results, but the market doesn’t read between the lines. Short-term investors see ‘plugging the well’ and assume it’s a dry hole with no commercial potential.”
In fact, 88 Energy’s April 6 announcement said: “It is now too late in the season to initiate flow testing operations and the forward program will consist of plugging the well. The well may be re-entered in the future … in order to drill a sidetrack and conduct a flow test.”
Kevin Frank, a geologist and section chief of Alaska’s Division of Oil and Gas resource evaluation team, agreed with Craig. In an April 7 interview with PN, Frank described the results from Opstad and his team at the well site as “encouraging.”
Frank’s reaction was similar to what ConocoPhillips said after it drilled its recent Harpoon well. The first well drilled in the prospect, Harpoon 2 was plugged and abandoned and declared a dry hole, but the company has no intention of abandoning the “promising” Harpoon prospect and expects to go back in to drill more exploration wells, possibly Harpoon 1 and 3. Merlin well results are better than those released about Harpoon 2 by ConocoPhillips.
“I think they (88 Energy) have done a good job,” Frank said, following a lengthy meeting with members of the division’s resource evaluation team. “They’ve collected well information from targets in the Nanushuk. They have reported shows, as described in their April 6 operations update, including evidence of oil in the cuttings that were brought to the surface while drilling. One of the characteristics of the oil in the cuttings is that oil fluoresces under UV light. They saw this,” Frank said.
“88 Energy conducted logging while drilling, or LWD and were encouraged by what they saw in multiple intervals. Additional data was collected via wireline run collecting a triple combo logging suite with the addition of a nuclear magnetic resonance, NMR, tool,” he said.
The triple combo measures “gamma-ray, resistivity and density of the formation, while the NMR provides an estimate of the mobility of the fluid present. In aggregate this data can be interpreted to gain insight into the clay/sand content, fluid type, porosity of the rock and mobility of the fluid in the rock,” Frank said.
That was 88 Energy’s first run on wireline.
The second run, he said, “sounds like a downhole sampler to take fluid samples. After setting the tool, fluid is run through an optical fingerprint sensor to evaluate the fluid prior to opening the sample chamber. This allows fluids that were introduced by the drilling process to clean up prior to taking a sample that is more representative of the reservoir fluid,” he said.
“They had troubles with the tool because of a power problem and so did not get a fluid sample,” Frank said.
“Getting a representative sample would have been nice. Unfortunately, they were unable to get that,” he said.
“After remedying the power problem, they made a second attempt but due to deteriorating hole conditions, the tool got stuck. They were able to pull the tool free,” Frank continued.
“They then made the decision that it was too risky so made a decision to call it a season and come back in the future to try again after the hole has been cleaned up. Given the late point in the season it sounds like they decided to demob before their snow road deteriorated. It makes complete sense to not risk stranding equipment on the tundra,” Frank said.
When asked if these situations are common, he replied, “Yes, very common on the North Slope when you’ve got projects working off of snow and ice roads and pads.”
Operators, Frank said, try to prioritize by getting the most meaningful information first.
Did 88 Energy do that? “Yes, I would say so. They were subject to time restraints. Adjustments and contingencies are to be expected,” he said, adding “you’d hate to get your data but end up stranding your rig or other equipment out there” until the next winter drilling season began - and having to pay rental rates for it the entire time.
“One point they make is that they did not get a chance to evaluate the two most prospective intervals they saw on their logs - so they have a strong impetus to … return for farther evaluation in the future,” he said.
“They found something they had not anticipated - a new prospective horizon in the Nanushuk formation that was not one of their pre-drill targets. It’s always nice to find something you hadn’t expected,” Frank said.
Was what 88 Energy did find promising? “There is still uncertainty, but they have reduced it by getting some positive signs,” he said.
“I think it is encouraging - what they did get,” Frank said.
His comments were endorsed by his boss, Division of Oil and Gas Director Tom Stokes: “88 Energy has actively explored the North Slope for many years. It is encouraging to see the results they achieved during this winter’s drilling activities,” he told PN April 7.
Another update April 12 On April 12, 2021, 88 Energy released another Merlin 1 update and said sidewall cores from the well confirmed the presence of oil previously observed in cuttings.
“They were analyzed at surface prior to being sent to the laboratory for further testing. Photos of whole core and small chips from the core were taken in white and ultraviolet light to determine fluorescence. The rock chips were also exposed to solvent to observe any cut,” the company said.
Fluorescence and cut are indicators of the presence of oil. Fluorescence and cut were observed over several horizons, confirming the observations previously reported based on cuttings. (See photos at https://wcsecure.weblink.com.au/pdf/88E/02362329.pdf).
88 Energy said the cores have been sent to the laboratory for further analysis.
The Reddit crowd 88 Energy is the parent of various Alaska subsidiaries such as Emerald House, which holds its NPR-A acreage, including the Peregrine project, and Accumulate, Regenerate and Captivate.
88 Energy trades as a penny stock on ASX as 88E, on AIM as 88E and on OTC as EEENF.
Until first quarter 2020, penny stocks were viewed by most investors as high risk.
But the COVID-19 pandemic triggered a flight from stocks into cash, and penny stocks became popular.
In the April 6, 2021, edition of Investor Place, contributor Robert Lakin warned that “a penny stock favorite of the Reddit trading crowd raised some questions” about 88 Energy’s Merlin 1 drilling results.
“Watch for shares of 88 Energy Limited (OTCMKTS: EEENF) to tank this morning, as they follow the more-than-65% drops of the London and Sydney-listed shares of the Australian oil explorer.”
“What’s behind the expectations for EEENF stock today?” wrote Lakin.
“It wasn’t the ‘good news’ part of its earlier update on its Peregrine project in Alaska ... Last week the company announced it had detected potential hydrocarbon-bearing zones while conducting drilling operations for Peregrine.”
“Instead,” Lakin wrote, “it’s likely the ‘bad news’ of this morning’s update from 88 Energy managing director Dave Wall.”
Wall “revealed a power outage due to equipment failure and other issues,” preventing the company from sampling its two highest prospective zones. “As well, further drilling may be required to confirm a discovery,” Lakin noted.
“Popular with penny stock investors,” EEENF stock was “discovered” in the Reddit zone,” he wrote, adding, “88 Energy has been one of the most buzzworthy Reddit penny stocks. Recent posts on the eponymous subreddit include claims that shares are ‘lottery tickets’ and takeover rumors.”
But the most recent buzz from the Reddit crowd is less positive, he said, which appears to be part of the reason for the major sell-off of 88 Energy’s shares and its plummet in price after its latest operations update on Merlin 1.
At one point the shares were at 33 cents, but more recently they were trading on ASX at 2.4 cents.
Lakin is described on Investor Place as a veteran financial writer and editor, following fintech, agtech and property tech startups. He said he did not hold any 88 Energy shares at the time he filed the article.
Much to applaud In its April 6 update, 88 Energy pointed out that it achieved the Merlin 1 results from a “wildcat exploration well drilled on sparse 2D seismic, 60 kilometers (37.3 miles) from the nearest control well, in the middle of the Arctic winter.”
The company also was pleased about finding a “new prospective horizon” in the Nanushuk formation that may all be within its Peregrine acreage and was not one of the pre-drill targets in Merlin 1.
One solid PN source said he understood the new interval might be an amazing 1,000 feet thick. No corroboration was provided by 88 Energy on April 6.
But Wall did say: “Particularly encouraging is the apparent presence of oil in a zone that has not previously been targeted in NPR-A. Whilst the potential volumetric size of this zone is not yet known - as it was not a mapped target in Merlin 1 - the formation could be extensive based on initial interpretation.”
The “other most prospective zone with good shows and petrophysical characteristics is shared with the Harrier prospect and will likely high grade that for drilling in 2022,” 88 Energy reported.
One PN source described Merlin 1 results as such: “If it walks like a duck, quacks like a duck, and swims like a duck, well….”
Umiat acquisition update In its March 31, 2021, update, 88 Energy announced that its acquisition conditions had all been satisfied for the Umiat oil field, which is adjacent to Peregrine on the south.
“The final condition related to the acquisition of the … oil field is now complete with cement work associated with plugging and abandoning of two historical wells at the field now executed,” 88 Energy said, noting “remedial site work will be finalized in the near-term.”
Umiat is an historic oil discovery made in 1945 in shallow Brookian (Nanushuk) sandstones.
The field is covered by two leases totaling 17,633 acres that are in a unit formed in September 2019 with an initial 10-year term.
“The current conditions of the unit stipulate a well commitment (exploration or appraisal) by Aug. 31, 2022,” 88 Energy said.
Eleven appraisal wells were drilled in the Umiat field by 1953, several of which were tested, the company reported: “Umiat 5 flowed 268 barrels per day on a 3-month test and Umiat 8 had a peak flow rate of 5.9 million cubic feet per day of natural gas during a 4-day test.”
Little work was done until 2013-14 when Linc Energy drilled two wells, Umiat 18 and Umiat 23H. Umiat 23H was tested with a maximum flow rate of 800 barrels per day and sustained flow of 200 barrels per day, 88 Energy said.
APDC bought in On Dec. 4, 2020, 88 Energy said it had finalized a farm-out agreement with Alaska Peregrine Development Co., or APDC, on its 100% owned Peregrine project.
APDC farmed in for a 50% ownership of the 195,000-acre Peregrine project by contributing US$11.3 million towards the cost of the Merlin 1 well, at the time estimating gross cost of US$12.6 million.
In the Dec. 4 announcement from 88 Energy’s board of directors, APDC was identified as “a special purpose investment vehicle organized for Project Peregrine,” its members “a consortium of private US entities managed by individuals that have extensive experience in oil and gas, including owning businesses that directly operate in the sector.”
“Being able to secure a farm-out deal with a high caliber partner on close to two for one deal terms in the current oil and gas environment is a major coup for our shareholders,” outgoing 88 Energy managing director Wall said.
“APDC is a close cultural fit for our proposed future plans for Project Peregrine. … We look forward to potential success as we approach the imminent spud of Merlin 1,” he said.
ELKO helped out And then came a Biden Executive Order, delays and associated cost increases.
As a result, 88 Energy entered into a share subscription agreement with ELKO International in which Alaska-based ELKO was issued 360 million shares at a share price of 1.8 cents. The deal, announced March 21, 2021, made ELKO one of the largest shareholders in the Australian firm, per 88 Energy’s website.
A well services contractor for the Merlin 1 exploration well, ELKO is 100% owned by Opstad.
“The market appears to be anticipating a win for 88 Energy … with punters running its share price up from a close of $0.017 yesterday to an intraday high of $0.023 today on big volumes. Only a week ago it was trading at around a cent,” Matt Birney reported March 22 in The West Australian.
“The endorsement of the project by ELKO as we enter the critical phase of the drilling is encouraging and will serve to fund the Company’s share of the recently announced cost overruns,” outgoing managing director Wall said in the announcement.
The Merlin 1 cost overruns were “directly related to delays associated with the Biden Executive Order regarding the issuance of the Permit to Drill for Merlin 1 costs associated with shutdown and re-start whilst clarification was attained regarding the Executive Order; delays associated with cold weather and the subsequent knock on to mobilization costs as a result of expediting activities to meet the operational timetable,” 88 Energy said.
Entered Alaska in 2015 88 Energy has been operating on the North Slope since 2015 having originally entered the region via an agreement in 2014 with Burgundy Xploration.
Previously, 88 Energy had been named Tangiers Petroleum, with oil and gas assets offshore Morocco and on and offshore Australia.
In November 2014, Tangiers joined forces with Burgundy, the agent and high bidder on almost 87,000 acres south of the Prudhoe Bay unit in the Division of Oil and Gas’ North Slope areawide lease sale.
Tangiers became 88 Energy taking an 87.5% interest in, and operatorship of, the leases, which the partners named Project Icewine.
In the ensuing years 88 Energy expanded its Alaska exploration lease holdings to 492,000 gross, 300,000 net, acres in the central North Slope, plus the latest acquisition in July 2020 of XCD’s 100% interest in the 195,000-acre Peregrine block in NPR-A, west of the central North Slope.
The company via subsidiary Accumulate also operated four exploration/appraisal wells on the North Slope in conjunction with partners - Icewine No. 1 in 2015, Icewine No. 2 in 2017, the Winx 1 well in 2019 and Charlie 1 in 2020.
None of the wells proved commercially successful, although according to 88 Energy the jury is still out on the Icewine unconventional targets in Icewine No. 2 and the condensate in Charlie 1.
Today, 88 Energy’s Alaska portfolio contains three key exploration project areas - Yukon Leases. Project Icewine and Project Peregrine. The company said in its July second quarter 2020 quarterly activity report that it had relinquished its Western Block leases where it drilled the Winx well.
As of the end of 2020, 88 Energy held a total of 231,000 acres in Project Icewine.
Yukon Gold leases In the 2017 and 2018 state areawide lease sales 88 Energy picked up eight leases on 15,234.71 contiguous acres on the eastern North Slope along the border of the ANWR 1002 area. Those leases contain a historic BP oil discovery, Yukon Gold, and are near recently commissioned infrastructure.
The 100% owned Yukon leases are operated by Alaska subsidiary Regenerate.
In its year-end 2020 report, 88 Energy said, “discussions continue with nearby resource owners to optimize the monetization strategy of the acreage, with permitting continuing for future potential exploration drilling in 2021, subject to farm-out.”
88 Energy acquired 3D seismic that was shot in 2018 over the leases. The company said a 90 million barrel resource had been identified in its Yukon acreage.
Also, in its 2020 annual report, 88 Energy said “subsequent to year-end, 88 Energy, via its wholly owned subsidiary Regenerate Alaska Inc, was named high bidder on Tract 29 in the 2021 Coastal Plain (ANWR 1002 area) Lease Sale. Tract 29 is comprised of 23,446 acres and is adjacent to 88 Energy’s existing Yukon Leases as well as the Point Thomson gas condensate field, which is currently in production. The acquisition of these leases represents a logical step in the Company’s aggregation strategy for oil resources in this part of the North Slope, where existing infrastructure provides a potential pathway to commercialization.”
Close to Yukon Gold A few miles north and a little east of Yukon Gold and the eight 88 Energy leases, Jade Energy owns and operates the untapped Sourdough prospect and is planning to drill a new Sourdough oil well in the winter of 2022 or 2023, under an agreement with Point Thomson operator ExxonMobil.
The well, on state lease ADL 343112 in area F, Tract 32, of the Point Thomson unit, will be drilled to approximately 12,750 feet to encounter a prospective Brookian sand target and Hue shale.
As part of the 2012 settlement between the State of Alaska and the working interest owners of the ExxonMobil Point Thomson unit, an East Pad was to be built, an East Pad well drilled and an additional well drilled in the unit.
The state has since agreed that the requirement will be fulfilled through independent Jade Energy’s plans for Sourdough, which will utilize some existing Point Thomson infrastructure for its operations.
ADL 343112 holds two mid-1990s Sourdough oil discovery wells that were drilled by BP, which estimated Sourdough held 100 million barrels of recoverable oil.
ExxonMobil and the other major working interest owner at the time assigned their full working interests in Tract 32 of the lease to Jade, each retaining a small overriding royalty. The deal gave all three North Slope producers some skin in the game, fully aligning them in delivering a successful Sourdough development.
By building a 70,000 barrel per day liquids export pipeline at Point Thomson that connects to the Badami unit and thus moves oil and condensate to Pump Station 1 of the 800-mile trans Alaska oil pipeline, ExxonMobil improved the development economics of other oil prospects to the east, such as Sourdough and Yukon Gold.
Jade’s owners are Anchorage-based Opstad and Castle Rock, Colorado-based Greg Vigil, who each own 50% of the firm, with Opstad in charge of management.
Project Icewine, conventional In 2019, 88 Energy signed a sale and purchase agreement with London-based Premier Oil Plc under which Premier farmed-in for a 60% interest in Area A of the conventional Project Icewine acreage, with 88 Energy retaining a 30% working interest in Area A and the remaining 10% working interest held by Burgundy.
Under the terms of the agreement, Premier paid the full costs of the appraisal well, Charlie 1, up to a total of $23 million to test the reservoir deliverability of the nearby 1991 Malguk 1 BP oil discovery.
The well came in under budget, but the results were not commercial, and the well was plugged and abandoned in April 2020.
Project Icewine, unconventional Unconventional detailed logs and sidewall cores were also acquired in the HRZ formation in Project Icewine.
The HRZ “remains a viable target and options to commercialize this potentially large resource continue to be pursued,” 88 Energy said in its second quarter 2020 activity report.
The company plans to conduct a formal farm-out process to fund further appraisal.
Enthusiastic about Alaska:
In his March 9, 2021, chairman’s letter, Evans praised Alaska’s North Slope, saying its source rocks “have been described as unbelievably rich and prolific, having generated and expulsed about 1.5 trillion barrels of oil. Yet only a small fraction of that 1.5 trillion barrels has been found, leaving vast potential remaining to be discovered.”
“Access to existing infrastructure, a very supportive and stable state government and significant exploration upside,” are three of the things 88 Energy likes about the state, Evans said, noting 88 Energy operates 444,517 net acres on the North Slope.
“Our prospective land holding is now of a size one would normally associate with the big end of town and provides continued scope to attract partners,” he said.
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