Oil Search finds way to advance project in volatile oil price environment
In addition to asking AIDEA to finance surface infrastructure for the Pikka project, operator Oil Search Alaska and its partner Repsol have switched to a phased approach for the North Slope unit that will reduce upfront development costs and allow cash flow from Phase 1 oil production to fund the subsequent two phases.
Although all details were not yet available as planning and discussions continue between the Pikka partners, on Aug. 25 from Sydney, Australia, Keiran Wulff, top executive of Oil Search Ltd., told Petroleum News that Phase 1 will involve one drilling pad versus three drilling pads, a smaller modular processing facility that can be expanded for subsequent phases and a flowline connecting to existing North Slope infrastructure.
Neither Wulff nor the half year results released Aug. 25 in Sydney (Aug. 24 in Alaska) said whether the phased approach will alter the peak oil production of the development, which Oil Search previously said would be 135,000 barrels per day, with expectations that value engineering work might increase it.
AIDEA, or the Alaska Industrial Development and Export Authority, is a public corporation of the State of Alaska that can offer relatively low interest rates and longer payback periods. AIDEA, created in 1967 by the Alaska Legislature, has “a public purpose” to “increase job opportunities” and “encourage the economic growth of the state, including the development of its natural resources, through the establishment and expansion of … energy” and other projects.
On Aug. 5, AIDEA’s board of directors approved a memorandum of understanding with Oil Search to investigate the potential of the authority financing access roads, gravel pads and bridges for the multi-billion dollar Pikka project (also known as the Nanushuk Development), which will ultimately include 26 miles of gravel roads, approximately 70 acres of gravel pads and 120 miles-plus of pipelines, excluding those involved in the seawater treatment plant.
Oil Search sees a financing deal being similar to AIDEA’s agreement for the DeLong Mountain Transportation System with the Red Dog mine in Northwest Alaska.
AIDEA would issue debt to purchase the surface infrastructure (some existing and others yet to be built) from Pikka’s owners, entering into a long-term use agreement with an associated fee.
Oil Search would agree to maintain and operate the roads and bridges, which would be operated as non-public, industrial use with access available to other commercial users and area residents for a fee, or toll.
According to Wulff, the following was completed by the end of the first half of 2020:
* Nanushuk access road to first drilling pad (ND-B road).
* Nanushuk operations pad.
* Nanushuk process facility pad.
* Bridge installation across the Miluveach River.
AIDEA and Oil Search also agreed to try to complete a financing plan for approval by first quarter 2021.
Standalone processing in Phase 1?When asked whether Oil Search would definitely be processing its own oil for Phase 1, Wulff said the company was proceeding as though it would be using its own standalone facility with startup in 2025 as planned, but that commercial discussions with neighboring producers for initial production processing might shorten the timeframe to first oil - if the outcome of those discussions proves agreeable to both parties.
Oil Search continues to work to get development costs down, which Wulff said is critical in today's volatile oil market. Having already reduced costs to match an oil price in the low $40s, the company is looking to get them below $40 per barrel before re-launching its partial divestment (15%) in a formal sell-down, likely in early 2021.
Wulff said the cost reductions in the Pikka project have “added significantly to the attractiveness of our Alaskan portfolio” and that Oil Search is “incorporating the results from this season’s very successful Mitquq and Stirrup discoveries” prior to beginning the sell-down.
Wulff and Oil Search's half year 2020 results said a final investment decision for Pikka was still expected by the end of 2021.
Progressing optimization of PikkaIn the information and slides released by Oil Search for the six months ending in June, the company said Phase 1 was within the already permitted scope of the project.
It also noted its successful 2019-20 drilling season with three oil discoveries and two tests: one east of Pikka, Mitquq 1 ST1, flowed at 1,730 bpd and the other near Horseshoe, Stirrup 1, which flowed at 3,520 bpd.
Those well results “provide options for further development,” Oil Search said, pointing to Stirrup as having “one of the highest single-stage flow rates from a vertical Nanushuk well on the slope.”
Studies are “well advanced to lower up-front capital expenditure and materially reduce project breakeven costs,” the company said.
The results of optimization activities and value engineering studies to identify opportunities will be announced in the last quarter of this year.
Importance of Mitquq, StirrupA slide titled “Importance of Mitquq and Stirrup discoveries” in Oil Search’s half year results said the finds have the potential to “create substantial additional long term value for shareholders,” noting the following:
* Mitquq discoveries are in same reservoir east of the Pikka unit project (5.6 miles east).
* This increases chances for a series of large reservoirs between Pikka project and Mitquq.
* A material prospective resource upgrade is likely.
* Mitquq discoveries have potential to underpin a tie-back development to Pikka.
* Stirrup discovery has potential to underpin a new major standalone development (Horseshoe),
The 2019-20 winter exploration program discovered oil in the “primary Nanushuk reservoir in both the northern (Mitquq) and southern (Stirrup) exploration areas,” Oil Search said in its half year summary.
The company also said in the summary that its “new organizational structure strengthens capabilities to deliver major growth projects. Further to the announcement on July 1 regarding a major organizational restructure, Oil Search has successfully integrated the new framework into the business,” noting a team dubbed Pathfinder has been established to “embed performance and set targets across the business, specifically focused on opportunities that increase free cash flow and further reduce unit operating costs.”
Wulff’s comments on results“The world is a very different place today than it was six months ago,” Wulff told Petroleum News.
“The unprecedented challenges due to COVID-19, the consequent disruption to the global economy and the precipitous decline in oil prices in the first half of 2020 have been catalysts for reassessing all areas of Oil Search’s business,” he said in comments included in the half year results.
“Without compromising safety or operational performance, we have systematically introduced initiatives to prioritize our activities, sustainably reduce operating costs, reduce current and forward non-core spend and lower breakeven costs for our in-field development and new growth projects. These programs will enhance the company’s ability to generate strong cash flow and to deliver our world class oil and gas growth assets at lower oil prices,” he said.
Referencing the company’s transformational reorganization, which was “benchmarked against local and international peers” resulted a “leaner and more streamlined business. The cost-out program, restructure and efficiency improvements within our operated assets are already reaping rewards from a production and profitability perspective, with unit operating costs 20% lower than in the first half of 2019,” Wulff said.
“Steps were taken in the first half to strengthen the company’s balance sheet. These included a 40% reduction in 2020 capital expenditure to conserve cash and a US$700 million equity raise to increase available liquidity,” he said.
“We are comfortable that the balance sheet can support the company’s liquidity needs in the event of a prolonged period of lower oil prices. Our highest priority is always to safeguard the health and wellbeing of our staff, contractors and people within our local communities.”
Early in the year, “well ahead of the imposition of government travel restrictions” and the full impact of the pandemic, Oil Search implemented a “comprehensive COVID-19 management plan” to protect employees and to ensure safe and reliable operational continuity.
“Over the second half of the year, in addition to continuing the initiatives commenced in the first half, our focus will be on completing the Strategic Review. The review is now well advanced and will incorporate analysis of global and local trends and company specific risks and opportunities, as well as valuable input from shareholders,” Wulff said.
Despite loss, shares roseOil Search’s core profit after tax for the six months to June dropped to $24.7 million from $165.2 million a year earlier as its average realized oil prices from operations outside Alaska fell 45% and LNG prices fell 15%.
Including write-downs on its PNG exploration assets, the firm slumped to a net loss of $266 million, Reuters reported.
Despite suspension of the dividend investors “shrugged off the result, sending Oil Search’s shares up 0.7%, roughly in line with oil price gains,” the news service said.