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The Explorers 2021: Jade Energy: Economics key to advancing Sourdough
Uneconomic with 40% Alaska NPSL tax; no one will fund & 1990s oil discovery on state land will remain undeveloped; Dunleavy offers fix Kay Cashman Petroleum News
Planning and permitting for Jade Energy’s 2022 winter drilling in the eastern North Slope Sourdough prospect is “on track and expected to accelerate” as ELKO International team members complete Emerald House’s (88 Energy) drilling operations at the Merlin 1 exploration well on the other side of the North Slope. That is what Erik Opstad, 100% owner of Jade parent ELKO told Petroleum News in an email March 19, 2021.
But as of April 6, 2021, it appears 88 Energy will have to go back in to sidetrack Merlin 1 next winter. How and if that will impact Sourdough drilling, which appears to be using a different drill rig, is unknown as The Explorers 2021 magazine goes into production.
That said, another of the Sourdough project’s major hurdles is still unresolved - the development is not economic while burdened with a 40% state of Alaska net profit share lease tax, a 12.5% royalty, “plus other commercial limitations currently associated with ADL 343112,” Opstad told Petroleum News March 19.
Jade is working with Sourdough stakeholders, he said, and making progress toward the mitigation of these limiting commercial issues, but there is still “some way to go.”
A net profit share lease, or NPSL, requires the lessee to pay the state a share of net profits - in addition to a traditional royalty percentage, the Alaska Department of Natural Resources’ Division of Oil and Gas said in a February 2021 presentation to the Alaska Senate Resources Committee.
Royalty payments begin with commercial production and are assessed on gross revenue, while net profit share revenue payments begin when the NPSL reaches payout stage - after exploration and development costs, with interest, are recouped by the operator.
Dunleavy’s remedy DNR is authorized to modify royalties to allow for continued or incremental production. Legislation proposed by Alaska Gov. Mike Dunleavy would extend that ability to NPSLs, potentially extending the life of a field as well as promoting the development of new fields such as Sourdough, which would result in additional royalties, net profit share, taxes, etc. that the state would not receive without the NPSL modification.
Currently, DNR said, it thoroughly reviews and negotiates a modification package for NPSLs and then must submit a proposal to the Legislature, with legislation required for the modification to take effect.
NPSL and royalty modification applications to DNR are “reviewed by a multidisciplinary group of professionals within several sections inside the Division of Oil and Gas, mainly by the Commercial and Resource Evaluation sections, with collaboration from Leasing, Units, Royalty Audit, and Royalty Accounting,” DNR communications director Dan Saddler told Petroleum News in a March 2021 email. “Current statutes also give DNR the option of procuring consulting services, at the applicant’s expense, on issues in which we don’t have in-house expertise.”
Dunleavy’s solution will allow DNR’s commissioner to have the final say, not the Legislature.
Net profit share leases were issued by the State of Alaska between the late 1970s and the early 1980s. There are currently 26 active NPSLs on the North Slope, with rates ranging from 30% to 79.59%, DNR said.
The progress and supporting information on Dunleavy’s bills can be found here:
* HB 81 at: http://www.akleg.gov/basis/Bill/Detail/32?Root=hb%2081
* SB 61 at: http://www.akleg.gov/basis/Bill/Detail/32?Root=sb%2061
Third plan of development Apparently hoping for the best, Jade is moving ahead with its first Sourdough appraisal well, Jade 1, shooting for a Feb. 15, 2022, spud date.
Activities the independent anticipated in its third and 2021 Sourdough plan of development (approved Dec. 14, 2020, by the Division of Oil and Gas), include the following, along with the status of the work on March 19, 2021, per Opstad:
1. Equipment and materials mobilization by snow trail to Point Thomson in first quarter. This has been delayed, as the necessary equipment is tied up on Merlin 1 in 88 Energy’s Peregrine Project in the National Petroleum Reserve-Alaska.
2. Permitting for 2022 winter drilling. This is on track.
3. Mobilization planning to Point Thomson. This is on track.
4. Third bathymetric survey of the service pier. This is on track and expected to occur in mid-July 2021 during the open water season.
5. Service pier approach dredging. This is dependent on bathymetric survey results. Jade has a U.S. Army Corps of Engineers dredging permit in hand.
6. Rig mobilization by barge to Point Thomson. It is still expected to occur in September 2021.
The main challenge to appraise and develop this mid-1990s BP Sourdough oil discovery, Opstad said, is that the development must be “shown to be commercial,” otherwise “no one will fund it! Economics 101!”
Slice of Point Thomson Jade filed its third plan of development for Sourdough in coordination with ExxonMobil, operator of the Point Thomson unit, and other PTU lease owners, on Nov. 1, 2020. The third POD for Point Thomson unit Area F, Tract 32, runs from Jan. 1, 2021, through Dec. 31, 2021.
Area F, which was created by the terms of the Point Thomson Unit Settlement Agreement between ExxonMobil and the other owners, consists of 7,647 non-adjacent acres in the northeastern and southeastern corners of the PTU (see map in the pdf and print versions of this story).
Jade became majority owner and operator of PTU Tract 32, ADL 343112 in the southeastern portion of Area F, by agreement with ExxonMobil in mid-2018.
In 1997 BP estimated the Sourdough prospect held 100 million barrels of recoverable oil, based on the results of its Sourdough 2 and 3 wells.
If developed, Sourdough will be the farthest east of all North Slope producing fields.
Some of the work in the second POD was to focus on selecting additional delineation and development well locations particularly in any “expansion” areas that may be added to ADL 343112 resources through negotiations with the other PTU working interest owners.
Various 3D seismic surveys have been acquired and interpreted over Area F.
One of these was new compressive sensing imaging, or CSI, seismic 3D data from the area during the 2017-18 winter season with parameters optimized to characterize Brookian strata. The CSI 3D survey was the first of three field studies.
“On the basis of CSI 3D seismic data, we have evaluated a location for Jade 2 sited considerably to the west of Jade 1 and adjacent to the PTU airport to prove up additional resources in ADL 343112,” Opstad said Oct. 27, 2020.
“We also have focused on working up additional delineation/development well locations in ‘expansion’ areas that may be added to ADL 343112 resources.”
Challenging element Mobilization of a drilling rig and heavy equipment is one of the more challenging elements of Jade’s plan for Sourdough. Most drilling programs on the North Slope access their drill sites by ice or gravel roads as will Jade, but the Area F POD adds a barging program between West Dock and the PTU Service Pier to the mix as an intermediate step.
Jade expects to stage the rig, equipment and some additional materials required to support drilling into a laydown area designated by the PTU.
Barging operations would occur in the summer and require some lead time to organize, particularly given the fact that some dredging will be required to land a barge at Point Thomson and potentially depart West Dock.
As part of its second plan of development, the Alaska independent pursued approvals to conduct a small-scale scree operation on the PTU Service Pier Approach.
Accomplished in second POD Among, but not all, the work done in the second POD period identified by Jade in its third POD filing was data evaluation. “Ongoing work conducted as part of developing the 2nd POD raised several concerns relative to Area-F development,” Jade wrote.
Given Jade’s interpretation of the Sourdough volumetric resources, at current oil prices development did not appear to be economically viable, particularly when burdened with a 40% net profit share and a 12.5% royalty, neither of which the division was able to modify.
During first quarter 2020 Jade and the agency “engaged in an intense and lengthy bout of economic modeling of Area-F resources using state of Alaska methodology. The details and results of that work are confidential under 38.05.035A(8), but we can say that the parties now understand the economic challenges to commercial development of Area-F,” Jade said in the third POD.
Among other things, a repeat bathymetric survey was also done in the second POD period. In September 2020 Jade executed the first offshore bathymetric survey of the PTU Service Dock Approach conducted in Alaska using a helicopter. Although one of Jade’s parent companies (ELKO International LLC) had been using helicopters to survey onshore lakes for several years to meet state permit requirements, “this fall was the first time those techniques had been employed in the offshore environment,” Jade said.
In 2021 Jade intends to develop a detailed barge mobilization plan for Nordic Rig 3 while also examining a snow trail alternative that may now be possible due to the availability of new technology.
Opstad, who oversees Jade’s operations in Alaska and is a 50% owner in the company, is a State of Alaska certified professional geologist who has worked the North Slope for 35 years, including a stint with BP in various roles and as a principal and general manager of Savant Alaska.
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