Providing coverage of Alaska and northern Canada's oil and gas industry
February 2024

Vol. 29, No.6 Week of February 11, 2024

Running room galore

Once Pikka is producing oil, Phase 2 could go to FID the same year

Kay Cashman

Petroleum News

Santos undertook its first drilling operations for Pikka Phase 1 in June with the powerful Parker 272 rig. In the months that followed it completed five wells, is on the sixth now, and is about to move to the seventh.

(See slides in the online issue PDF)

The company is focused on its Pikka Phase 1 development, but in commenting on a Santos North Slope map Joe Balash, Santos senior vice president of external affairs, said "as you move in sort of a clockwise fashion you see Quokka and Horseshoe as well as some non-unitized acreage. We are a significant holder of state leases, and this area in particular is focused on the Nanushuk formation and plays. These are clinoforms, stratigraphic traps that exist in succession going east to west. And we think there are quite a number of them," he added.

"Our expectation is that the rocks can sustain multiple projects going forward in the 80,000 barrels per day increments for quite some time," Balash told members of the Alaska Senate's Resources Committee, co-chaired by Senator Cathy Giessel, in his Feb. 5 presentation.

Balash was asked how much in direct revenues Santos' first North Slope development would mean for the state of Alaska.

"Just in terms of the 30-year life of phase 1, all-in taxes, royalties, property tax and the like at a roughly $65 per barrel long-term price, around $7 billion to the state treasury," Balash replied.

"Now one thing you might be asking yourself is how an Australian company is going to execute a project in the Arctic. We're well accustomed to dealing with sand, but snow and ice is a little bit different. So as the business unit has been assembled here, we put a premium on attracting talent that is from Alaska with Arctic experience," he said.

Santos has 1,200 beds filled on the North Slope, 259 of them from the company's "org chert," Balash said, noting 82% of those were hired in Alaska. "The rest are workers supplied by our contractors" and he did not have the number of local hires for contractors.

"So whether it is Price-Gregory doing pipeline installation or Conam doing the facility integration, we have multiple contractor workers in those beds," Balash said.

Phase 3 blows

"I don't know how difficult it has been to find all these people, but our camps are full. So at this point in time the workforce numbers are not our biggest challenge. We're contending with a series of blows that have come through with phase 3 conditions and keeping our work from happening as efficiently as we might like." Still, per company reports, Pikka Phase 1 remains on track.

Pikka Phase 1 will produce 80,000 barrels per day starting in the first half of 2026 from state of Alaska acreage. (In this core area Santos has a 51% working interest and its partner Repsol, a Spanish company, has a 49% interest.)

That oil going down the Trans-Alaska Pipeline System will help all North Slope producers, Balash told committee members.

"That 80,000 barrels per day when it enters the trans-Alaska pipeline is going to have the effect of spreading costs across all the barrels. In the first 10 years we expect our production will reduce the TAPS tariff by about $1.15. That makes every other barrel on the North Slope more valuable. It's the same thing as increasing the prices by $1.15. So that's a benefit that accrues to everybody -- other operators, the state for oil tax and royalty," he said.

Furthermore, Balash said, "once we achieve first oil in phase 1, we'll have revenue and be in a position to take final investment decision on phase 2. In essence it's just going to mirror the facilities on the other side of the pad. And so what that means, of course, in 2026 we could conceivably be taking FID on the next Pikka phase, and by 2028, 2029 be at a higher level of production on the North Slope."

Kuukpik deal

"One of the things that makes our project unique from others on the Slope is our leases are issued by the state of Alaska but the surface is owned by the Native village corporation for the city of Nuiqsut, Kuukpik."

Santos has a land use agreement with Kuukpik.

"Among other considerations, we have subsistence representatives that basically live in our camp. They have access to see anything thing they want, any time they want. And report back to Kuukpik on our activities and make sure we're conducting things the way they expect -- consistent with the spirit of our agreement which is fundamentally to protect subsistence resources," Balash said.

There are other considerations as well. he said.

"We do provide some work to Kuukpik. They're not provided with certain awards in the contracting process, but we give consideration to them and their affiliates," he said.

Kuukpik and Kuukpik affiliates "have done well in the bidding process, They've not won all the awards they have bid on but we do communicate with them about what's coming, so they can be reasonably prepared," he said.

Almost like building tunnels

Sen. Click Bishop asked Balash whether it was correct that Parker Rig 272's longest well was 30,000 feet and its shortest 7,600 feet.

"That's correct," Balash said.

"So you have an extended reach rig?" Bishop asked.

"We have one of the more powerful rigs on the North Slope. One thing I would note for the committee, our vertical depth is rather shallow but in response from the community of Nuiqsut, we agreed to move our pad further back away from the river. The consequence of that is our wells are longer, but they're also steeper. And that's presenting some challenges that our team is up for but we are having to drill wells at a very steep angle and in those portions where we have to cement, it's almost like we're building tunnels as opposed to wells," Balash said.

Rig 272 is owned by a partnership between Parker Wellbore and Kuukpik.

Dispute with ConocoPhillips

Sen. Bill Wielechowski asked Balash the status of the "dispute over road use with ConocoPhillips."

"We are currently operating over the road infrastructure on the North Slope that comes off the Dalton Highway through Prudhoe, Kuparuk and onto our location (Pikka). We were in a position where we needed assurance that we had road access to execute the project and sought from the Division of Oil and Gas a multi-use land permit, a MULP. They granted that in April 2022. We were then able to take final investment on Pikka Phase 1," Balash said.

"The permit was appealed up to the commissioner (of the Department of Natural Resources.) The commissioner found in the division's favor," he said.

"It was then taken to (Superior) court at the end of 2022 (by ConocoPhillips Alaska Inc.). It continues to sit on administrative appeal in front of Judge Andrew Greley," Balash said. (The action was against DNR to block a Division of Oil and Gas-issued permit that granted Oil Search (Alaska) LLC access to OSA's Pikka Phase 1 development project using CPAI-built and maintained roads/corridors in the Kuparuk River unit. As operator for, and on behalf of the Kuparuk River unit oil and gas lease lessees, CPAI appealed the DNR Commissioner's Dec. 1, 2022, Final Decision, asking the Alaska Superior Court to revoke OSA's two-year access permit.)

Wielechowski said he had a copy of a legal opinion that said "because of some action the state took, the state now agrees with ConocoPhillips."

Balash said, "it's a rather complicated tale of woe. Because of a different road issue associated with the Mustang Road, AIDEA had taken a position that looked an awful lot like Conoco's appeal of our miscellaneous land use permit. And the arguments being similar even though they are different authorizations, different law, different facts, the argument made is that they are 'like to like'".

Therefore, "the Legislature in going through the appropriations process last year had some language that has now been cited by Conoco in this litigation saying the Legislature sided with AIDEA in that dispute and therefore has sided with Conoco in this dispute," Balash said.

"It's something - we find pretty strange, to say the least. That's the nutshell version of it," Balash said.

"I can't speak for anyone else, but that certainly was not my intent when I was voting," Wielechowski said.

"What is the impact to the state and to your project if the state loses this lawsuit?" Wielechowski asked, seemingly to Balash as a former DNR commissioner and as a Santos representative.

"I'll start with the narrow. From Santos' perspective. We were presented with a certain demand of compensation for road use. And that amounts to hundreds of millions of dollars over the life of the project. A - 20% increase to our project costs. That is an incredible additional burden to our project economics. - If we are basically in a position as a distressed user of the infrastructure, required to pay an amount uncapped, just whatever the incumbent determines is fair in their eyes, that would be a severe constraint not only on our project, our future projects, but anybody else looking to invest in exploration of state acreage because what that does is put you in a position of having to wait until you've identified the resource, discovered it, permitted it, are ready to develop it and then handed an unknowable amount of a bill at the end of that process. Companies like mine and others would tell the Legislature if you changed our taxes by that much at the last minute, it would be a tough place to invest. How is a made up road fee any different?" Balash asked.

"It doesn't seem like we're facing an imminent decision by the judge. Every day that goes by we are a day closer to having the project complete There's not anything that is in the way of our progress. The state has multiple tools to assure access and I'm confident the department will continue to work with us to assure access," Balash said.

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