88 Energy plans Icewine follow-up

88 Energy Ltd. is planning a second well at its Icewine prospect.

Through its subsidiary Accumulate Energy Alaska Inc., the Australian independent is permitting and fundraising for the proposed Icewine No. 2-H well at the onshore prospect covering nearly 272,000 acres in the central North Slope, south of the Prudhoe Bay unit.

Along with minority partner Burgundy Xploration, 88 Energy expects to spud the follow-up well from the Franklin Bluffs drilling pad sometime in the first quarter of 2017.

Between now and then, the partners need to complete a preliminary analysis of a 2-D seismic survey conducted earlier this year and finalize financing for the project.

The companies drilled the Icewine No. 1 well in late 2015 to assess the resource potential of the HRZ shale - one of the three stacked source rocks in the central North Slope.

According to the company, the results indicated the potential for commercial development, pending similar results from the follow-up well. “Analysis of core, logs and geochemistry indicates compelling prospectivity based on thermal maturity, matrix permeability, and resource concentration,” 88 Energy told investors in June 2016.

The goal of Icewine No. 2H is to prove the production potential of the HRZ shale.

As currently envisioned the well would proceed directionally for 14,877 feet to a total vertical depth of 11,100 feet and include a 3,000-foot lateral through the target formation.

With the recent seismic acquisition - funded with a credit facility from Bank of America secured against state of Alaska tax credits - 88 Energy hopes to not only de-risk the horizontal section of the well but also identify conventional development opportunities.

Economics

To date, the few independent companies that have tried to develop North Slope source rocks have struggled to initiate production in a region where economies of scale are both crucial and hard to create. Unlike a traditional reservoir, where a relatively small number of wells can use underground pressures to drive hydrocarbons to the surface, source rock development requires a vast grid of wells to drain small sections of a formation.

In recent years, Great Bear Petroleum Operating LLC and Royale Energy Inc. both determined that any unconventional program would require a corresponding conventional program to fund operations in the short term until infrastructure could be developed.

Earlier this year, DeGolyer & MacNaughton estimated that the HRZ shale at Icewine contains 985.3 million barrels of liquids in a mean case. The estimate included both oil and wet natural gas and condensate. Internally, the companies believe the prospect contains more than 2.6 billion barrels of liquids in a mean case. The difference, according to 88 Energy, comes from a disagreement over how much of the acreage is productive.

Currently, 88 Energy expects to drill as many as 1,200 wells to develop the entire Icewine prospect - between 10 billion and 21 billion barrels of oil in place, depending on the differing estimates. The development would include 30 wells each from 40 pads, with eight processing facilities. By comparison, more than 3,400 wells have been drilled to pursue the approximately 25 billion barrels of oil in place at the Prudhoe Bay unit.

According to 88 Energy assumptions, each Alaska well would cost between $9 million and $17 million, compared to an average cost of $7.8 million for a Lower 48 well, according to U.S. Energy Information Administration estimates. And other operating costs in Alaska also appear to be higher than Lower 48 equivalents with the possible exception of royalties, which can vary depending on private landowners. All told, 88 Energy is presenting a range of exploration and development costs between $27 and $68 per barrel, depending on the total size of the resource and the severity of its expenses.

One undeniable advantage of the project is its location, which would require a 15-mile transmission line and a short road to the trans-Alaska oil pipeline and Dalton Highway.

- ERIC LIDJI