Conoco acquires Tofkat prospect

State restricts leases because of earlier inability to explore in region

ERIC LIDJI

For Petroleum News

Way back in 2002, the Alaska Department of Natural Resources added nearly 60,000 acres to the Colville River unit to incorporate four nearby prospects: Nanuq, Fiord, Oberon and Titania. While operator ConocoPhillips eventually developed Nanuq and Fiord as satellite fields, the company dropped the Oberon acreage after a disappointing exploration well and the Titania acreage after missing a similar work commitment.

The Alaska Venture Capital Group LLC later acquired the leases of the Titania prospect, created a joint venture partnership, conducted an exploration program and formed the Tofkat unit. But that work never yielded a development program at the oil prospect.

Now ConocoPhillips has once again acquired a piece of the Titania/Tofkat prospect. But the state is limiting the acreage the company can own for the time being, in part because of its previous inability to explore the prospect the first time around. While the Tofkat unit working interest owners asked the state to transfer 100 percent interest in all 22 leases at the unit to ConocoPhillips, the state only approved the transfer of seven leases.

Part 1: Titania

From the beginning, Phillips had planned a step-out strategy for the Colville River unit, where carefully timing the development of midsize satellites would allow the company to maximize its infrastructure and processing equipment. When the company asked to expand the unit, in August 2002, the proposed acreage included two proven satellite fields (Nanuq and Fiord) and two promising exploration prospects (Oberon and Titania).

At the time, the best information about Oberon and Titania came from a 3-D seismic survey conducted in the winter of 2000 and 2001 as part of Nanuq exploration work.

When Phillips requested the expansion, it proposed several work commitments.

The company agreed to drill one Oberon exploration well by June 2003 and a second by June 2004. And it also agreed to provide a written commitment for a Titania exploration well by June 2003 and to actually drill the well by June 2004, with other commitments for delineation wells and forming a participating area to follow. In both cases, Phillips agreed to lose portions of the expansion acreage if it failed to meet its commitments.

By fall, after a merger, ConocoPhillips Alaska Inc. was proposing Titania as one of several North Slope exploration wells being permitted for the upcoming winter drilling season. The other prospects included Oberon, as well as the nearby Placer prospect.

The proposed Titania exploration program was to occur between December 2002 and December 2007 on an ice pad on Kuukpik Corp. lands some five miles southeast of the village of Nuiqsut. ConocoPhillips proposed as many as two wells and two sidetracks.

Even after the disappointing results of the Oberon No. 1 well convinced ConocoPhillips to relinquish more than 26,000 acres associated with the prospect in August 2003, the company insisted it would continue with its plans to explore the Titania prospect.

But those plans never materialized. The Titania acreage automatically expired when the state contracted more than 16,000 acres from the Colville River unit in July 2004.

Part 2: Tofkat

At an October 2004 lease sale called “Independent’s Day,” because only one major oil company bid, AVCG acquired the block of acreage near Nuiqsut for $478,080. The company later acquired some additional acreage in the area at a different lease sale.

By early 2006, AVCG was looking for funding to explore as many as five prospects across the North Slope, including the Titania prospect. With its proximity to the Colville River unit, the company saw the possibility of a field on par with an Alpine satellite.

“We’re more excited than when we first bought the acreage,” managing director Ken Thompson told members of the Alaska Industry Support Alliance at the time.

Over the next six months, the AVCG subsidiary Brooks Range Petroleum Corp. formed a joint venture with three independents to explore Titania and other prospects. Like Titania, many of those prospects were in the “billion dollar fairway,” which was ARCO Alaska’s term for the land nestled between the Kuparuk River unit and the Colville River unit.

By October 2007, BRPC was permitting a Tofkat exploration program, using a new name to avoid confusion with the Titania exploration program abandoned a few years earlier.

In early 2008, BRPC drilled the Tofkat No. 1 well and two sidetracks at the prospect using Nabors rig 27E and also acquired some 200 square miles of 3-D seismic over the prospect. The well collected 10 oil samples from three sandstone reservoirs in the Brookian formation and a fourth sandstone in the deeper Kuparuk formation.

The Tofkat No. 1 well encountered six feet of net pay in the Kuparuk formation. Early on, BRPC estimated that the prospect contained about 40 million barrels of recoverable oil in the Kuparuk C sands and another 20 million in the deeper Jurassic sands.

By early 2009, the joint venture was discussing plans for another Tofkat well by late 2010. But instead AVCG pursued the North Tarn prospect near the southwest corner of the Kuparuk River unit. An exploration program ultimately proved to be successful, leading to the Mustang Development Project at a new Southern Miluveach unit.

As the Tofkat leases approached their expiration date, the joint venture applied to form a unit. The Department of Natural Resources approved an application for the Tofkat unit in 2011. The unit covered some 9,131 acres over 22 state of Alaska and Arctic Slope Regional Corp. leases. An associated plan of exploration required BRPC to drill and complete a well into the Kuparuk formation by the end of May 2013 and, along with its working interest owners, sanction a Tofkat development project by October 2013.

But work at the Mustang project took priority. BRPC missed the May 2013 deadline at Tofkat. The Department of Natural Resource placed the unit into default and required BRPC to complete its original work commitments by May 2014 to cure the default.

While the joint venture relinquished other acreage in its portfolio, it remained protective of the Tofkat prospect. In early 2013, BRPC announced plans to drill the Tofkat No. 2 well and Tofkat No. 2A sidetrack over the coming winter using Nabors rig 106.

But those plans never materialized and BRPC missed its second deadline. In July 2014, the Department of Natural Resources asked the company to propose a solution - the second step in the default process. That August, BRPC asked the state to reconsider the default, blaming its failure to drill in part of permitting delays from local authorities.

The department agreed to reconsider and held a hearing in October 2014. But in late January 2016, after considering the testimony, DNR Division of Oil and Gas Director Corri Feige affirmed the original default. BRPC accepted the ruling rather than appeal to the Superior Court.

Termination

While the primary term of the leases expired, state regulations automatically extend the term of any lease in a terminated unit for 90 days - a secondary term of the lease.

And in May 2016, the five working interest owners at Tofkat - Caracol Petroleum LLC, TP North Slope Development LLC and MEP Alaska LLC, AVCG LLC and Nabors Drilling Technologies USA Inc. - asked to transfer the Tofkat leases to ConocoPhillips.

Given the recent inability of BRPC to develop the acreage, and the previous inability of ConocoPhillips to explore or develop it, Feige was skeptical about approving the deal.

Of the 22 leases in the former unit, all but seven would expire as soon as the termination period ended, and the rest were set to expire at the end of June 2017, Feige noted.

Once the leases expire, they would become eligible for a future lease sale. “Anecdotal evidence suggests the acreage which encompasses the Tofkat unit lands is valuable exploration acreage and is likely to attract a wide range of potential bidders and substantial competitive bonus bids for the state,” Feige noted in her June 2016 ruling.

The timing of the request also concerned Feige. While regulations provide a secondary term for leases, the goal is to encourage drilling or production. But in this case, Feige wrote, the companies were trying to “circumvent the intent of the extension provision.”

And Feige was also concerned about the royalty structure on the leases. Given that the acreage is owned jointly by the state and ASRC, the royalty rate on the 15 leases set to expire at the end of June 2016 is 16.66667 percent - considerably higher than the typical 12.5 percent royalty rate on leases owned exclusively by the state. Additionally, those leases have a 3 percent overriding royalty interest. Altogether, this 20 percent royalty interest would leave only 80 percent for an operator, which Feige worried could shorten the economic life of the field by limiting the amount of capital available for investment.

For those reasons, Feige allowed the Tofkat unit joint venture to transfer the seven leases set to expire in June 2017 to ConocoPhillips. But she denied the request to transfer the 15 leases currently in their secondary term and set to expire this year.

A Tofkat satellite?

Without the other 15 leases, the seven preserved leases are not entirely contiguous to the Colville River unit. The preserved leases also do not include the Tofkat No. 1 well.

But given that the 15 expired leases will appear at an upcoming lease sale, ConocoPhillips could potentially assemble another Alpine satellite in the near future.

That corner of the North Slope is a growth area for ConocoPhillips.

The company brought the CD-5 satellite of Alpine into production in late 2015 and is currently working to bring the GMT-1 development into production at the Greater Mooses Tooth unit to the west, in the National Petroleum Reserve-Alaska. Earlier this year, ConocoPhillips applied to expand the Colville River unit to make it contiguous with the Greater Mooses Tooth unit and ease the gradual step-out of future development.