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The Explorers 2008: The little explorer that could Eight years in, AVCG preps third drilling season in Gwydyr Bay, moves toward possible development Eric Lidji Petroleum News
You can call Alaska Venture Capital Group one of the children of the Charter.
Formed in 1999 by long-time oilmen John Jay “Bo” Darrah Jr. and Barton Armfield, the Kansas-based holding company came to Alaska at a dynamic time, when a wave of mergers and acquisitions changed the face of the oil industry.
One of those big deals, the BP-Amoco acquisition of ARCO Alaska, led to a massive divestment of property and assets, designed to address growing antitrust complaints.
The divestment came about in the “Charter for Development of the Alaska North Slope,” brokered by the state. But in addition to divestment, the charter also required the major companies to allow access to their North Slope facilities at “reasonable terms.”
The high cost of operating in Alaska often challenges the economics of projects that would be no-brainers in other parts of the country. Companies in Alaska looking to develop large oil fields by Lower 48 standards, some 20 million barrels or larger, have to consider massive infrastructure components like new processing plants and pipelines.
The possibility of guaranteed access to these facilities helped encourage many smaller independent oil companies to come to Alaska around the turn of the century, companies like Winstar Petroleum, Armstrong Oil and Gas, Arctic Falcon and AVCG.
From the start, AVCG planned to find, explore and develop smaller light oil prospects looked over or left behind by the majors. Today, the company holds some 341,000 gross acres split among several prospects across the central North Slope.
Over the past eight years, AVCG assembled a management team of former ARCO and ConocoPhillips executives, bringing big company experience to a small independent, according to Hillary McIntosh, manager of business development and external affairs for Brooks Range Petroleum Corp., the local operating arm of AVCG.
“Their expertise in their fields allows them to ‘be’ their own departments,” McIntosh wrote in an e-mail to Petroleum News on Oct. 10. “Being small allows us to be nimble when changes have to be made.”
Brooks Range Petroleum leads a four-company joint venture responsible for one of the most active North Slope exploration programs this past winter. This coming winter, the joint venture plans to delineate Gwydyr Bay prospects first considered back in 2001.
First stab at Gwydyr Bay AVCG shot out of the starting gates in Alaska.
At a November 2000 state lease sale, the group acquired 11 tracts in a swath of land nestled between the National Petroleum Reserve-Alaska, the Alpine field and the Kuparuk River unit. Through a land swap with Phillips Petroleum in early 2001, the company picked up a minority working interest in several Gwydyr Bay leases.
Working with majority interest owner BP Exploration (Alaska) that summer, AVCG formed the Sakonowyak River unit, and made plans to drill two exploration wells, one no later than May 2003 and another by May 2004.
The onshore-offshore Gwydyr Bay area just north of Prudhoe Bay had long been considered a prospective oil region, with BP identifying several small pools, but none large enough to justify development. That description matched the new AVCG strategy.
“We wanted to drill a well at Gwydyr Bay — that’s what started all this,” Darrah told Petroleum News at the time.
The company announced plans to drill the Sak River No. 1 exploration well targeting the Kuparuk C 1 sand. AVCG would fully fund the program, with BP operating the well.
But the companies kept delaying the drilling program over the next year and a half, and finally AVCG cancelled the exploration plans in Gwydyr Bay altogether in February 2003, and asked the state to disband the Sakonowyak River unit.
AVCG said at the time it couldn’t find any partners to help fund the program.
“There were some tough structural geological problems with the prospect that were hard to explain away and that coupled with other North Slope ‘fear factors’ may be why we could not find help to evaluate the prospect,” Darrah said in February 2003.
AVCG also said it faced problems as it negotiated for access to the nearby Prudhoe Bay facilities it would need to use to bring Gwydyr Bay resources online. Companies hoping to buy space at existing processing plants and pipelines traditionally pay “back-out” fees to compensate facility owners for any production they hold back to free up capacity.
“What slowed us down (for Gwydyr Bay) was getting final farm-in agreements and seismic from the majors. It took twice as long to get agreements and seismic from the majors as what it took us to get permits from the state,” Ken Thompson, managing director of AVCG, told the Alaska Support Industry Alliance in January 2006.
BRPC takes over operations The Gwydyr Bay setback slowed AVCG down, but didn’t temper its enthusiasm.
In its first two and a half years in Alaska, the group continued to steadily grow its land position on the North Slope, and by the time it pulled out of Gwydyr Bay in 2003 AVCG held an interest in 108,000 acres across five distinct North Slope prospects.
The following year, AVCG began to regain its momentum.
Over the first half of 2004, AVCG formed Brooks Range Petroleum and opened an office in Anchorage. Later that year, the group brought former ARCO senior executive Ken Thompson on board as an investor and managing member.
The company hoped Thompson’s experience on the North Slope, which included first-hand knowledge of several Brooks Range Petroleum prospects from his time with ARCO, would alleviate the concerns potential investors and partners had about Alaska.
Thompson also brought ideas for lowering operating costs on the North Slope.
“We’re working with ASRC Energy Services and others … on new concepts (to lower processing facility costs) such as smaller-scale and skid-mounted production systems — what we call ‘micro-processing units,’” Thompson told Petroleum News in late 2004.
The company picked up 3-D seismic for 40,000 acres of its total holdings, by then up to 142,000 acres total. The seismic identified three prospects believed to hold more than 90 million barrels of oil, well above the 50 million barrel range the company hoped to target.
By mid-winter of 2005, Brooks Range Petroleum picked up the old expired Gwydyr Bay leases, this time with 100 percent working interest and a new plan for drilling an onshore exploration well to tap the offshore prospect before the end of the drilling season in April.
“The prospect did not get funded in 2002 because at that time we had not solved the oil marketing and facility sharing problems — getting the oil off the North Slope without utilizing Prudhoe assets and their associated production back-outs,” Darrah said in late January 2005. “Since then Thompson and AVCG have solved that problem.”
But Brooks Range Petroleum still wouldn’t drill at Gwydyr Bay for another two seasons.
Launching a 3-year strategy AVCG expanded over 2005 and 2006, both in terms of its land holdings and its reach.
The group picked up a 30 percent working interest in the ConocoPhillips-operated Cronus unit southwest of Kuparuk. Together the companies farmed the prospect out to Pioneer Natural Resources, who would drill exploration wells in 2006. Ultimately, Pioneer decided the prospect couldn’t be developed economically.
Brooks Range Petroleum also formed the Whiskey Gulch unit south of Kuparuk after picking up control of the prospect from Anadarko Petroleum in the summer of 2005.
Former ARCO and ConocoPhillips executive Jim Winegarner joined Brooks Range Petroleum in August 2005, adding more big company experience to the independent.
Then, during a meeting that fall, AVCG and Brooks Range Petroleum re-organized its corporate structure: AVCG would hold all acreage and ownership interests and would control all exploration approval decisions, while Brooks Range Petroleum would become a technical and operations services subsidiary for the group.
The meeting also launched a three-year strategy focused on five central North Slope prospects: Cronus, Gwydyr Bay and Whiskey Gulch, as well as Ocean Point and Titania, both along the Colville River and the border of the National Petroleum Reserve-Alaska.
To fund those projects, the company partnered with the Calgary independent TG World Energy Corp. in March 2006; with the Nabors subsidiary Ramshorn Investments Inc. in June; and with the Calgary independent Bow Valley Energy Ltd. in October. Thompson said the joint venture was “fully funded for exploration for the next three years.”
Brooks Range Petroleum filed a drilling plan in December 2006 for two wells and a sidetrack in Gwydyr Bay in the coming winter. The company spud the North Shore No. 1 well in February 2007 and the Sak River No. 1 well that March.
Sak River No. 1 turned out to be a dry hole, but North Shore No. 1 found “approximately 70 feet of oil-charged Ivishak sandstone formation,” the company announced in April.
Expanding drilling efforts This past winter, the joint venture both focused and expanded its exploration efforts.
Using Nabors rig 27E, Brooks Range Petroleum re-entered North Shore No. 1 in January 2008 to test both the Ivishak and the shallower Sag River formations.
The well flowed at a rate of 2,092 barrels per day of oil from the Ivishak formation, but a mechanical problem down hole compromised the Sag River test. One partner estimated the formation could have flowed as much as 1,000 barrels per day, if unencumbered.
The joint venture also drilled the Tofkat No. 1 well east of the village of Nuiqsut. The companies took 10 oil samples from four different sandstone reservoirs and found six feet of net pay in the Kuparuk formation, the deepest zone tested.
The joint venture also drilled two sidetracks to find the edge of the Tofkat reservoir, and acquired 210 square miles of 3-D seismic over the prospect, previously called Titania.
Over the summer, the companies expanded their Gwydyr Bay holdings after picking up 5,120 acres in three state leases north of Prudhoe Bay from Pioneer Natural Resources. The acreage includes the Pete’s Wicked oil prospect discovered by BP in 1997.
After the land acquisition, the four-company joint venture met to discuss strategies for “establishing a threshold” at Gwydyr Bay, or finding methods of developing the tight grouping of fields and satellites in the region in the most economic manner.
More Gwydyr Bay drilling The joint venture plans to drill as many as three wells this winter, exploring two prospects along the Gwydyr Bay coastline, between the Sakonowyak and Kuparuk rivers.
The goal is to prove up enough reserves to justify developing the prospects.
The joint venture is running economic models and starting early engineering work related to future facilities, and expects to apply for a development unit soon, McIntosh said.
Brooks Range Petroleum plans to drill the North Shore No. 3 exploration well this winter from the same pad used to drill North Shore No. 1.
The well would require five miles of ice road connecting to existing gravel roads in Prudhoe Bay to the south, according to operations plans filed with the state in August.
A little more than a mile to the north, Brooks Range Petroleum also plans to drill Sak River No. 1A, a sidetrack of the dry hole the joint venture drilled in 2007. If the well is successful, the company would also drill a second sidetrack, Sak River No. 1B.
The joint venture also plans to shoot 3-D seismic over its Slugger prospect on the eastern edge of the central North Slope. The companies picked up the prospect in October 2007.
McIntosh said the company plans to “shoot a substantial amount of our unevaluated acreage” in the future, and expects to “continue a strong exploration program when we move to development” at its existing prospects.
ACES and gas pipeline issues Over the past year, the joint venture benefitted from a revised tax code enacted by state lawmakers in November 2007 called Alaska’s Clear and Equitable Share, or ACES.
As the most active North Slope explorer without production, Brooks Range Petroleum and its partners took advantage of an expansion of the exploration tax credit, without yet having to face the accompanying increase in production taxes.
“For a company our size, I believe the ACES tax structure is balanced enough,” McIntosh said. “The state has been a good partner for new explorers. Who was really hurt with the changes was the majors producing-exploring in Prudhoe Bay and Kuparuk.”
The joint venture is currently focused on light oil resources, but said gas could become a possibility in the future if a pipeline to market ultimately gets built.
For small companies with no intention of owning a share of the gas pipeline, ability to get space on the line on a steady timeline and at a reasonable price is a major issue.
Brooks Range Petroleum believes open access is guaranteed under both the state-backed TransCanada proposal and the producer-led Denali—The Alaska Gas Pipeline.
The larger issue for Brooks Range Petroleum, though, has nothing to do with shipping gas. A pipeline would free up capacity at existing North Slope facilities, McIntosh said.
“Having a way to get gas to market could be beneficial to smaller companies like BRPC or other small companies that rely on existing infrastructure on the slope,” she said. “It could de-bottleneck facilities since gas would be taken off fields instead of recycling it. Back-out access wouldn’t be such a big issue.”
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