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Savant accelerates Badami drilling plan Incentives in ACES, Alaska’s new production tax system, behind its investment in North Slope exploration, development Kay Cashman Petroleum News
Savant Alaska isn’t waiting until 2010 to complete two wells in the eastern North Slope’s Badami unit — a commitment operator BP made to the State of Alaska last year as part of its seventh plan of development. Instead, the Alaska subsidiary of Denver-based Savant Resources, which contracted in 2008 with BP to redevelop the field, plans to drill both an exploration well this winter and re-enter an existing Badami well to drill a horizontal sidetrack. The first well was part of BP’s 2009 commitment to the state; the second well part of its 2010 commitment.
The exploration well will be in the Red Wolf prospect, outside the Badami sands participating area, but within the larger Badami unit, which has been producing oil, off and on, since 1998. (When BP was advertising for a farm-in partner for two Badami unit satellites in 2001 and beyond, the prospect was referred to as Prospect No. 1.)
The geologic target at Red Wolf, which lies in the western part of the unit, is primarily oil in the Middle Ellesmerian Kekiktuk formation. The well will be deeper than the wells in the Badami participating area that were drilled into Brookian formation — a total vertical depth of about 12,500 feet vs. 10,500-10,700 feet. (The Badami unit was initially designed to produce oil from Brookian sands at approximately 9,900 feet.)
In a Jan. 14 interview with Petroleum News, Savant executive Greg Vigil said that “Savant’s most likely reserve estimate for the Kekiktuk accumulation” was “45 million barrels.” (Initially, before it ran into technical production problems at Badami, BP hoped to recover 120 million barrels of oil from the unit’s Brookian sands.)
The Red Wolf well will be down-trend from BP’s nearby offshore Liberty project, in the same fault block as Liberty’s discovery well, Vigil said.
The nearby BP-operated Endicott unit has produced oil from several zones in the Kekiktuk formation. According to State of Alaska reports, Kekiktuk sands are the highest quality reservoir rock currently producing on the North Slope. The Kekiktuk Zone 2 in the Liberty field is similar to Endicott’s, and thought by BP and Savant to be similar to the sands at Red Wolf.
The Kekiktuk accumulations in all three fields can be accessed using vertical and near-vertical wells, unlike Badami’s Brookian accumulation, which consists of a series of turbidite sandstones that were deposited over time as amalgamated channel sands within mud-dominated submarine fan systems.
In simpler terms, turbidites are a sedimentary deposit laid down by a muddy current on the ocean floor at the bottom of the continental shelf. Turbidites form like fingers on a hand as mixtures of sand and water flow periodically into a marine basin — each flow typically results in a thin layer of oil-bearing sand that lies sandwiched between layers of fine silt or mud that over time becomes shale.
Published descriptions of Badami’s Brookian accumulation suggests its reservoirs are complex, consisting of 61 identified fans laid down during seven depositional events, with thin and discontinuous reservoir-quality sands.
The trouble has been getting the thin pockets of oil-bearing sands, or channels, to “communicate” so that oil moves from one to the next and into the wellbore.
After BP’s poor luck with getting vertical and near-vertical wells to continuously produce at Badami, and having to stop to allow the channels to recharge, BP and Savant think they will have better luck accessing the thin channels of oil with undulating horizontal well bores.
Opens Anchorage office, using Doyon 16 Savant, which opened an Alaska office in early January in the Anchorage Business Park, will be using the Doyon 16 drilling rig for its Badami wells this winter.
Doyon 16, currently working in Prudhoe Bay, will drill the exploration well from the “B1-38 well slot on the Badami gravel pad,” Vigil said.
“It’s been of great benefit to Savant to have BP work with us to get Doyon 16 under contract. BP has been very cooperative, very helpful,” he said.
After drilling at Red Wolf, Savant will “re-enter and sidetrack the (existing) B1-11A well. We are hoping to drill about 1,500 feet of lateral section into the Brookian sands.”
Vigil said Savant has all of its “permits in place to conduct operations at Badami, including a five-year ice road land use permit from Endicott to Badami. Right now we’re plowing the snow off the ice” road path, which winds about 27 miles along the coast.
“As a crow flies it’s closer to 20 miles,” he said.
The ice is thick enough to hold pickups and lighter loads, but once the company gets the insulating blanket of snow removed, the route will freeze down deeper, and then be sprayed with sheets of water to form a stronger ice road that can handle heavier loads.
Drilling is expected to start in February, Vigil said.
Stop and start unacceptable The Brookian oil pool at Badami was discovered in 1990, and developed through a 1997 and 1998 drilling program. The pool has now been penetrated by 19 well bores, most of which are clustered near the center of the Badami unit.
Badami began production in August 1998, and peaked at an average rate of just 7,450 barrels per day during September of that year. To date the easternmost developed field on the North Slope, Badami was expected to produce some 35,000 bpd at its peak.
Production rapidly declined to 3,300 bpd by January 1999, and the field was shut in from February through April.
Production was restarted in May 1999 and jumped to an average of nearly 5,300 bpd in July 1999. However, by year-end 1999, production had dropped to less than 3,000 bpd, and by July 2003 it averaged less than 1,300 bpd from six wells.
In August 2003, the State of Alaska approved BP’s request to temporarily shut down Badami until midyear 2005.
In September 2007 the field was taken off line once again due to low production rates in the range of 900 bpd.
In its Badami redevelopment report to State of Alaska officials in November, Savant said only four of the original wells were capable of production, and all of them would have to be re-worked.
Vigil said Savant does not intend to “go forward under a stop and start scenario.”
By re-entering the old wells to drill horizontally into the Brookian section, and hydraulically fracturing the numerous channels to reach more of the oil-bearing sands, “we think we can … sustain production for a longer time,” he said.
The technology for fracturing a horizontal well didn’t exist when BP was developing Badami in the late 1990s, Vigil said.
Hydraulic fracturing involves pumping large amounts of fluid into a well in order to create new avenues in the reservoir for oil to travel to the surface.
“To date all the Brookian penetrations have been vertical. With the type of well construction we’re looking to do, and by drilling horizontally, we can statistically improve the wells … sustain production for a longer time, and get away from the produce, shut-in and recharge cycle,” he said.
Will re-evaluate economics after both wells assessed The Kekiktuk formation’s potential 45 million barrels of oil “brings economic scale” to the Badami unit, Vigil said, especially in the “current oil price environment.”
What about $30 oil? Will the redevelopment and restart of Badami be economically feasible if oil prices stay in the $30-$40 range?
After all, the deal between BP and Savant was announced in July 2008, when oil prices were in the $140 per barrel range.
“We’re still excited about the Badami opportunity,” Vigil said Jan. 14. “It fits a company our size very well.”
It’s less risky to “take on technical risk than resource risk,” he said, noting that Savant prefers to “go after proven accumulations on the North Slope.”
Vigil did not offer any predictions about oil prices. He did say, “After we complete both wells … weather allowing, this winter … we will be able to reassess the economic viability of the entire project based on the commodity and futures market at the time. We’re not changing our near-term plans based on today’s oil prices.”
ACES incentives promote investment A major contributing factor in Savant’s decision to move forward at Badami in the face of “relatively low” oil prices has been the incentives in the State of Alaska’s new production tax system.
The tax credits in ACES, Alaska’s Clear and Equitable Share, “are an incentive for new entrants to Alaska,” Vigil said. “It is very important to companies like ours because ACES offers incentives for us to invest dollars in the state by being able to recycle those dollars back into the exploration and development.”
“ACES was an important component for Savant in considering investment in Alaska. It definitely had its intended consequences with us,” which was to increase oil and gas investment in the state, he said.
“We don’t necessarily agree with other parts of ACES, the way the severance tax is assessed, and the increase.”
For example, the Brookian accumulation at Badami “would have been tax exempt under the old tax system, tax exempt under ELF. … It didn’t help marginal fields that’s for sure, but it certainly induced investment through exploration and development incentives,” Vigil said.
He acknowledged that the new tax system is far less advantageous for the major producers at the big Prudhoe Bay and Kuparuk River units, “but for someone new to state or for a company that does not already have a large production base … credits for capital investment and the credits for net operating losses ACES are very advantageous.”
“I hope those incentives will stay in place because they certainly induced us to invest in the state,” Vigil said.
ASRC holds 10 percent working interest Alaska’s largest Native regional corporation, Arctic Slope Regional Corp., or ASRC, holds a 10 percent working interest in the two wells being drilled this winter at Badami.
Savant holds a 90 percent working interest, Vigil said.
BP brought ASRC on board, following through on a mentoring relationship the companies entered into in 2003.
ASRC holds title to some 5 million acres across the North Slope. Those lands include a percentage of the Colville River unit, extensive acreage across the foothills of the Brooks Range and leases in the Arctic National Wildlife Refuge.
But in addition to owning land, ASRC is also a major player in the Alaska oil industry, largely through its oilfield services subsidiary, ASRC Energy Services, which has more employees in the state than BP or ConocoPhillips.
Through its subsidiary PetroStar, ASRC also owns one of the few refineries in Alaska.
ASRC’s mentoring agreement with BP set up a framework for sharing data and technical knowledge between the companies, allowing ASRC to learn about investment opportunities on the North Slope.
“This agreement provides a critical next step in providing ASRC with access to the tools and knowledge we need to become a competitive, independent producer in Alaska,” Jacob Adams, then president and CEO of ASRC, said in July 2003.
BP hoped the agreement would help bring more North Slope prospects into production.
“This agreement is … hopefully going to provide an opportunity for a company like ASRC to invest where BP would choose not to,” Steve Marshall, then president of BP Exploration (Alaska), said at the time.
The new exploration effort at Badami will be the first major project under the deal.
“It has been incumbent upon ASRC to be poised and ready to respond when BP is ready to forward opportunities to ASRC,” ASRC executive Mark Kroloff wrote to Petroleum News in September 2008.
To get “poised and ready to respond,” ASRC became involved in a number of other partnerships with companies across the North Slope in recent years, including joining with ConocoPhillips and Union Oil Company of California, now part of Chevron, in 2004 on the Placer No. 1 exploration well on ASRC leases west of the Kuparuk unit.
More recently, ASRC joined the ongoing efforts of Doyon Ltd. and Usibelli Energy to explore the resource potential of the Nenana basin southwest of Fairbanks.
And in 2008, ASRC partnered with Anadarko Petroleum and BG on an exploration well at the Jacob’s Ladder unit southeast of Prudhoe Bay.
Kroloff said ASRC sees the Badami program not only as an “investment opportunity,” but also a way to expand the company’s “internal capacity in oil exploration and development. Our subsidiary, ASRC Energy Services has contracted to BP for many years to operate Badami. We expect that contract to remain intact and should we be successful in exploration with Savant then we would anticipate AES’s role to increase as development and operational functions increase in the unit.”
If Savant is successful in redeveloping Badami, Kroloff said it “will have revitalized exploration options on the east-side of the North Slope and we will be a player in its future.”
Erik Opstad heads local operation Savant’s newly opened office in Anchorage will be headed by the company’s general manager for Alaska, Erik Opstad, Vigil said.
The space in suite G-40 at 4720 Business Park Boulevard is about 2,500 square feet in size, and is home to a number of full-time Savant employees, including Opstad, Steve Rog, HSE manager, and Mary Rush, logistics manager.
The company’s Anchorage phone number is 907-868-1258, and its fax number is 907-868-1455.
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