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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2019

Vol. 24, No.27 Week of July 07, 2019

Significant step

Oil Search exercises $450M option to buyout Armstrong at Pikka, Horseshoe

Kay Cashman

Petroleum News

The days of the Alaska North Slope producing under 500,000 barrels of oil a day may soon be over as the first major U.S. conventional oil discovery in decades drew closer to production on June 27 when Oil Search Ltd. exercised its option to sharply increase its stake in Pikka and Horseshoe leases west of the central North Slope. The company and minority partner Repsol SA are planning a Pikka development that will produce 120,000 bpd, initially from the big Brookian Nanushuk discovery and then later tapping into other stacked plays in the unit.

Oil Search is looking at early production of some 30,000 bpd in 2022 with full production in 2024 versus its original plan of full production in late 2023.

The $450 million option Oil Search exercised was with privately held Armstrong Energy and Armstrong’s minority partner GMT Exploration that effectively doubled the company’s acreage in the leased acreage, per the June 27 statement from Oil Search’s Sydney office (it was received June 27 in the U.S. but dated June 28, the date in Australia).

Armstrong initially brought Oil Search to the North Slope in March 2018 with a $400 million buy-in of Armstrong and GMT’s working interests in the acreage, transferring operatorship from Armstrong to Oil Search’s wholly owned subsidiary, Oil Search Alaska.

Aligning interests with Repsol

In this latest action, Oil Search and Repsol have aligned their interests across many of their shared North Slope assets, resulting in Oil Search retaining 51% in the Pikka unit and the Horseshoe block, while also purchasing a 51% interest in leases Repsol acquired in 2017, which are immediately east of Horseshoe within the prospective Nanushuk trend.

When the Armstrong/GMT option closes at the end of August, the alignment will result in a net payment of $64.3 million from Repsol to Oil Search.

Looking better and better

The decision to invest more heavily in Alaska, which was part of an effort to diversify away from dependence on liquefied natural gas production in Papua New Guinea, comes after Oil Search reviewed drilling and 3D seismic results in the Pikka and Horseshow over the past 18 months.

In its June 27 statement Oil Search said it was taking into consideration drilling results from the 2018 ConocoPhillips Putu wells and the two Oil Search wells, Pikka B and C, drilled earlier this year.

“All these wells, which included six reservoir penetrations, were drilled in, or immediately adjacent to, the Pikka unit Nanushuk trend,” the company said. “An integrated analysis of the results of these wells, with detailed reservoir and resource modelling, has increased Oil Search’s confidence that there will be a material upgrade to the resource estimates, above the acquisition case, which assumed 400 million barrels gross within the Pikka unit Nanushuk reservoir and 100 mmbbl gross” in adjacent exploration acreage.

Armstrong and Repsol have previously estimated Nanushuk could hold 1.2 billion barrels of recoverable light oil.

“Material value has been added to these assets through successful drilling and testing over that time and attractive development options have been matured,” Oil Search said June 27.

“As soon as the analysis is completed, upgraded resource estimates will be validated through an assurance process and formally announced ahead of a FEED decision on the initial (Pikka) development,” Oil Search said. FEED, or front-end engineering and design, was supposed to be decided this summer, but June 27 Oil Search was less specific, saying it would take place “in the second half of 2019.”

Early output, sharing talks

The 30,000-bpd early production system will use existing capacity in the processing facilities of an “adjacent,” but unnamed, operator, which will generate early cashflow for the partners, Oil Search said.

Discussions for possible facilities sharing on the 120,000-bpd development are also underway with “current North Slope operators,” Oil Search said. Negotiations are targeted to be completed by the time a Pikka FEED decision is made.

The Nanushuk oil field lies between ConocoPhillips’ Colville River unit on the west and Conoco’s Kuparuk River unit on the east.

Armstrong ties, final EIS

As far as its ongoing and future relationship with Armstrong, Oil Search said the two companies would continue to work together in reviewing opportunities on the North Slope, in accordance with the area of mutual interest agreement, or AMI, that was entered into as part of the original March 2018 acquisition.

Oil Search also said “material progress” has been made on key permits, most notably the approval of the Environmental Impact Statement Record of Decision, received in May from the U.S. Army Corps of Engineers, which was a major Pikka project milestone.

Taking on a third partner

Oil Search and Repsol originally intended take on a third major partner for Pikka and Horseshoe acreage “back-to-back with the exercise of the Armstrong option,” the company acknowledged in its June 27 statement.

“Despite not running a formal process, in late 2018/early 2019 Oil Search received strong expressions of interest from third parties, including an attractive conditional offer, to acquire an interest from the joint venture in the Pikka unit development project and adjacent leases,” Oil Search said.

The process was “suspended in early 2019 due to a change in partner views regarding the upside resource potential, following the positive results of the 2018/19 appraisal drilling and the increase in resource potential recognized in the Horseshoe area, both within the existing field extension and in newly identified Nanushuk prospects within the Horseshoe block,” Oil Search said, validating rumors and related statements from Repsol executives that the Madrid-based major was interested in increasing, not decreasing its North Slope investments.

Oil Search said it will be “recommencing a formal divestment process” to bring in a third major partner for some of its interests in its Alaska portfolio, scheduled to conclude in the first half of 2020, ahead of a final investment decision for the initial Pikka unit Nanushuk development. The timing will allow Oil Search to incorporate the results of its 2019-20 winter drilling program.

Oil Search reiterated its intention to “retain approximately a 35% interest in its core assets,” while maintaining its position as operator.

In addition, “a standard AIPN model joint operating agreement has been implemented that is better suited for a major development and the introduction of a new partner,” Oil Search said. (APIN is the Association of International Petroleum Negotiators, an independent not-for-profit professional membership association that supports energy negotiators around the world.)

Horseshoe standalone project?

Oil Search also briefly referred to its plans for next winter’s appraisal and exploration drilling in the Horseshoe area south of the Pikka unit, noting Horseshoe could either be tied into the Pikka development or have its own standalone development.

On Feb. 18, Oil Search said it planned to drill three more Horseshoe wells and acquire new 3D seismic in the area in the 2019-20 winter season, but in the June 27 update Oil Search said it would be a two-rig, two well program.

The focus of the new seismic would be south of Pikka in the Horseshoe and Grizzly prospect areas, likely seeking other geologic targets not yet encountered in drilling, the company said in February, when it first named several of the other prospects it was looking at (see map and story “Oil Search beams” in Feb. 24 issue of Petroleum News).

At that time Oil Search first introduced Grizzly, south and east of Horseshoe, as the next in a series of oil prospects it was pursuing.

Funding the option

Oil Search said it would fund the $450 million option with Armstrong and GMT from its existing $900 million of corporate debt facilities, while an additional $300 million of credit lines was being arranged to provide the firm with further financial flexibility.

The new credit facilities would have a term of one year, to “cover the maximum period anticipated until the planned sell-down of a portion of the acquired Armstrong interests,” Oil Search said.





Pikka first in series of projects

With more oil potential in the Nanushuk formation to the north and south of its Pikka development, Oil Search sees Pikka as the first of a series of potential developments in a fairway between the Colville River and Kuparuk River units, Richard D’Ardenne, Oil Search senior vice president of development, said Jan. 18.

The Nanushuk reservoir for Pikka extends more than 60 miles north to south and, while the company has not explored the more northerly end of that trend, there is promising acreage to the south, in the area of the successful Horseshoe exploration wells drilled by Armstrong, he said.

The expectation for the Pikka project was an initial processing facility with capacity to handle 120,000 barrels per day of oil. The idea was to repeat that many times in the fairway over the next 10 years, with more projects coming down behind the one that was underway, D’Ardenne said.

“So, it will be an interesting ride,” he said. “We’re going to be in this for the long haul.”

Horseshoe, for example, might turn out to be an expansion to the Pikka development. Or it could involve its own standalone production facility, D’Ardenne said.


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