Caelus sanctions Nuna

Company has already started mining gravel at the Oooguruk unit satellite

Eric Lidji

For Petroleum News

Caelus Natural Resources Alaska LLC has “fully sanctioned” the Nuna development.

The subsidiary of Caelus Energy Alaska LLC has already begun some initial construction work on the Oooguruk unit satellite, off the northwest coast of the Kuparuk River unit, Senior Vice President for Alaska Operations Pat Foley wrote in a March 11, 2015, letter to Alaska Department of Natural Resources Deputy Commissioner Marty Rutherford.

According to the letter, the Caelus Energy Alaska board of directors sanctioned the project and committed $76 million of its 2014 capital budget to the project in September 2014, subject to the approval of a pending request for royalty modification. The state approved that request earlier this year and reduced the royalty rate on five leases associated with the Nuna development to 5 percent. The approval contained conditions that created some uncertainty as to whether Caelus would ultimately choose to proceed.

“We are excited to report that our Nuna development project has been fully sanctioned, construction activities have commenced and we are safely on track to satisfy all the milestones required by the January 20th Royalty Modification,” Foley wrote.

Just five days after the ruling, Caelus began mining at Mine Site E and hauling gravel to the development site, in the Oliktok Point region. Before the end of winter, the company intends to use approximately 985,000 cubic yards of material to build a 2.5-mile access road, a 22-acre drill site and an expansion of an existing tie-in pad, according to Foley.

The company told state officials it has already “prepared and executed” 16 authorizations for expenditure totaling more than $480 million and intended to prepare another 31 authorizations for well operations, totaling, in aggregate, more than $800 million.

Four years from proposal

Pioneer Natural Resources Alaska Inc. proposed the Nuna development in late 2010, after having drilled through the Torok formation for several years to target deeper oil reservoirs.

Initially, Pioneer developed the Oooguruk unit using an artificial gravel island. The Nuna satellite, though, was too far south to be economically developed from the island. Instead, Pioneer wanted to build at least one onshore drill site and potentially standalone facilities.

In early 2012, Pioneer drilled the Sikumi No. 1 well from an offshore ice island and the directional Nuna No. 1 from an onshore ice pad. A “deep test” of the Ivishak at Sikumi No. 1 was “basically non-commercial,” but Nuna No. 1 yielded a 50 million barrel discovery from the Torok. Pioneer drilled the Nuna No. 2 appraisal well in early 2013 and increased its estimate for the Torok to a range of 75 million to 100 million barrels.

When Caelus acquired the Alaska assets of Pioneer Natural Resources Inc. in late 2013, the company said it would begin developing Nuna “pretty much immediately.” And after the company closed on the acquisition, in early 2014, CEO Jim Musselman said, “We’ve got the funds committed and we’re moving forward as quickly as we can,” estimating some $550 million on new facilities and $800 million to $900 million for drilling wells.

In July 2014, after having evaluated the geology more closely, Caelus asked the state to modify the royalty structure at Nuna, saying it would be unable to proceed otherwise.

The company requested a flat 5 percent royalty rate on 11 leases until the project reached payout - meaning revenues had covered upfront costs - at which point royalty rates would increase by 1.875 percent annually, for four years, and then return to their original levels. Instead, the state offered the company a 5 percent royalty rate on five Nuna leases if Caelus met various sanctioning, spending and development targets through early 2017.

In late January, after a comment period that yielded some skepticism, most notably from Rep. Les Gara, the state approved the royalty reduction. The ruling required Caelus to sanction the project by the end of March 2015, start spending money by the end of September 2015, spend at least $260 million and bring the field into sustained production by the end of September 2017. The final decision also retained early requirements for Caelus to provide public reports to extend knowledge about developing similar geology.