Providing coverage of Alaska and northern Canada's oil and gas industry
June 2015

Vol. 20, No. 23 Week of June 07, 2015

Explorers 2015: Lawsuit delays Royale exploration program

Financial dispute between partners pushes source rock exploration program into 2016 at the earliest

Eric Lidji

For Petroleum News

This year, Royale Energy Inc. was supposed to become the second company to drill wells explicitly targeting source rocks on the North Slope. Instead, a lawsuit between partners forced the San Diego-based company to postpone its plans until next year, at the earliest.

In 2014, Royale began permitting a two-year exploration program. The company planned to drill as many as four wells over two North Slope prospects: the Aki prospect south of the Colville River unit and the Central prospect south of the Kuparuk River unit. In late July 2014, Royale cancelled a contract with Kuukpik Drilling after its partner, Rampart Energy Inc., declined to fund a cash advance on the rig, according to the companies.

The financial matter spawned legal claims and counterclaims between the partners.

“Because the case is only a number of months old, we are unable to provide an evaluation of the likelihood of an unfavorable outcome nor can we estimate the amount or range of potential loss,” Royale wrote in its most recent annual report, filed on March 31, 2015.

Sohio legacy

Although new to Alaska, Royale is building on old credentials.

Vice President for Exploration and Production Mohamed Abdel-Rahman came to Alaska in the early 1980s, while working as a geologist for Sohio. He initially focused on the southern half of the state and eventually became the district geologist for the entire state.

Abdel-Rahman was working for Sohio in 1983, when the company drilled the Mukluk well in Harrison Bay. The $1 billion well was the most expensive dry hole in history.

Abdel-Rahman led a post-mortem investigation. “At the time it was not fashionable to talk about biomarkers - organic compounds that are characteristic of the organisms from which the oil is generated - but we did biomarkers work in Mukluk and compared it to all the other oils that had been discovered on the North Slope. We found an astounding match of the Mukluk oil and Kuparuk oil,” Abdel-Rahman told Petroleum News in early 2012, adding, “In my view there is no doubt that the Mukluk oil went to Kuparuk.”

The work convinced Abdel-Rahman about the nature and location of the North Slope source rocks, which would have “charged” Prudhoe Bay, Kuparuk and other big fields.

With Royale, Abdel-Rahman decided to pursue a source rock exploration program on the North Slope. The company initially wanted to get a sufficient amount of “internal infrastructure” in place before bidding on acreage. But after Great Bear Petroleum LLC took some 500,000 acres of source rock prospective acreage in an October 2010 lease sale, Royale decided it had better make its move if it wanted to enter the region. “We were caught by surprise when Great Bear Petroleum took that much acreage. It forced us to move quickly,” co-CEO Stephen Hosmer told Petroleum News in early 2012.

In December 2011, the company spent $2.7 million on nearly 100,000 acres of North Slope leases prospective for source rock development. The leases were in the Franklin Bluffs region, south of Kuparuk and south of Nuiqsut along the Colville River.

The central North Slope has three stacked shales: the Triassic-age Shublik formation, the Jurassic-age Kingak shale and the Cretaceous-age Hue, or HRZ, shale. Of those, Royale has been most excited about the Shublik, which the company believes is similar in its composition to the booming Bakken formation of North Dakota. “Everything we picked is optimum for oil generation - in all three shales,” Abdel-Rahman said in 2012.

As with Great Bear, Royale intends to pursue conventional oil targets on its acreage, which would allow the company to earn some revenue while it pursues the larger target.

The small company also holds interests in the Sacramento basin and San Joaquin basin of California, as well as in Utah and Texas, and produces some 15 million cubic feet of natural gas per day from its wells. After testing the concept with the Monterey shale of California, the company wanted to take another stab at unconventional resources, which is what led it to consider the possibilities of the three Alaska source rocks.

Seismic results

In early 2012, Royale announced plans to look for a joint venture partner to help fund a six-well program - two wells on each of its three lease blocks - for the following winter. In early 2013, Australia-based Rampart Energy agreed to spend $43 million on exploration in return for a large stake in the Royale land position on the North Slope.

The deal allowed Rampart to acquire between 10 percent and 75 percent working interest in the western block of leases and a 75 percent working interest in the Central Block by making various payments and funding various seismic programs by specific deadlines.

The partners commissioned SAE Exploration to conduct a 3-D seismic survey over 120 square miles of the North Slope. A preliminary interpretation “identified a large conventional target, covering an area of up to 20,000 acres,” according to Royale.

Rampart said that the results also suggested some source rock potential.

“The preliminary results available to date are showing excellent data quality and clearly highlight the key interpretable intervals such as the Brookian and HRZ packages, and near top Kingak Formation,” Rampart CEO Torey Marshall said in an April 2014 statement, referring to the Brookian formation that is producing at various places across the North Slope and also to two of the three source rock formations present in the region.

Permitting and delays

After the survey, Rampart committed some $50 million to upcoming exploration.

In an oil discharge prevention and contingency plan released for public comment in August 2014, Royale described “plans to conduct a regional, multi-year onshore oil and gas exploration drilling program during the winter months on the North Slope.”

The Aki and Central Exploration Drilling Program included plans for two areas.

The company said it had identified locations for eight potential wells at its Aki prospect along the Colville River south of the village of Nuiqsut and for six potential wells on its Central prospect south of the Kuparuk River unit. The company said it intended to “drill up to four exploratory well locations during the two winter seasons between 2014 and 2015; with potential additional locations drilled within the lease blocks in future years.”

The Aki wells would have been drilled from a temporary ice pad accessed by a snow/ice road from Kuparuk River unit Drill Site 2P. A separate snow-ice road from the Franklin Bluffs staging area along the Dalton Highway would have accessed the Central wells.

The Aki and Central prospects have “both conventional and unconventional formations,” according to Royale, which listed the conventional formations as Upper Jurassic, Kuparuk and Brookian and the unconventional as Shublik, Lower Kingak and shale.

After Royale cancelled the rig contract, Rampart launched a “Strategic Partnering Process” to “identify funding partners” for the program. The company said it wanted to perform additional technical work “to present the true potential of the opportunity to prospective industry and financial partners, and secure favorable commercial terms.”

By late October, discussions on how best to advance the exploration program were still “continuing,” according to Rampart. In a statement at the time, the company said, “The parties have differing views on a number of key issues regarding the joint venture and there is no guarantee that a mutually acceptable resolution will be reached. As a result, the board is considering all options regarding its future involvement in the project.”

Royale placed a lien against Rampart in November 2014. Rampart filed a counterclaim against Royale in December, “alleging breach of contract, violation of the covenant of good faith and fair dealing, unjust enrichment, defamation, violations of the Alaska Securities Act and seeking to undo the filing of the lien claims,” according to Royale.

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