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Explorers Preview: Jade working Sourdough
Small independent facing down numerous obstacles on eastern North Slope
Eric Lidji for Petroleum News
The excitement of the word “discovery” belies a basic fact of the Alaska oil industry: finding oil is often only a small first step on the road to developing it. The bigger step is finding an economic way to bring a discovery - even a large one - to market. Obstacles include geology, geography, infrastructure, politics, global economics and financing.
Jade Energy Inc. is currently walking that lonely road.
The subsidiary of independent ELKO International is looking to explore the Sourdough prospect within Point Thomson Unit Area F on the eastern North Slope in early 2023. And while the company stands upon decades of work conducted by BP Exploration Alaska Inc. and others more than a generation ago, the project remains hampered by its challenging economics, as well as by a sequence of frustrating administrative delays.
Various operators conducted seismic operations over the area from the mid-1970s into the 1990s. BP drilled two wells on the Sourdough lease in the mid-1990s. In 1997, it announced a discovery estimated to contain some 100 million barrels of recoverable oil.
In the nearly 25 years since then, the eastern North Slope has been haltingly but gradually opening through developments at the Badami unit and then at the Point Thomson unit.
By extending the pipeline infrastructure across hundreds of miles of the eastern North Slope, those two units have improved the possibility of a “string of pearls” - a series of developments between the Prudhoe Bay unit and the Arctic National Wildlife Refuge.
Those include Yukon Gold, Stinson and Sourdough.
But to make Sourdough work, Jade Energy needs some help, both globally and locally.
Globally, it needs oil prices to remain above $90 per barrel for an extended period of time. Locally, it needs assistance from Alaska policymakers and from industry partners.
Even though many of those factors remain unresolved, the company is continuing to permit its proposed Jade No. 1 exploration well. Given the long lead time in the Arctic, the company is looking to position itself to move quickly when circumstances align.
Jade Energy LLC is a partnership between two longtime North Slope veterans: Anchorage-based Erik Opstad and Colorado-based Greg Vigil, who each own 50%.
History Initial exploration of the Sourdough prospect began in the mid-1970s, as part of exploration activities at what is now called Area F of the Point Thomson unit.
Exxon commissioned the Point Thomson 3D seismic program over 70 square miles of Area F in 1989. BP commissioned the Yukon Gold 3D program over 95 square miles of Area F in 1994 and the Mammoth 3D program over 13 square miles of Area F in 1997.
BP drilled the 12,562-foot Sourdough No. 2 well in March 1994 and the 12,475-foot Sourdough No. 3 well in March 1996. The company announced its discovery in 1997 but also successfully petitioned the AOGCC to grant extended confidentiality on both wells.
Area F was created as part of Point Thomson settlement talks a decade ago. It brings together 7,647 acres of non-contiguous leases in the northeast and southeast corners of the unit. The Sourdough project is targeting the southeastern leases, known as Tract 32.
Exxon drilled three wells in the northeastern leases between 1975 and 1995: Alaska State A-1 and Alaska State A-2 from ADL 047556 and Alaska State G-2 from ADL 343110.
Given its location at the far eastern edge of the Point Thomson unit, the Sourdough prospect has long been seen as a potential gateway to a future development in ANWR - not only because its physical proximity could bring infrastructure to the edge of ANWR but also because some geologists believe the Sourdough reservoir extends into ANWR.
Recent work Immediately after being formed in 2018, Jade Energy LLC commissioned a new compressive sensing imaging, CSI, 3D seismic survey over the Sourdough area.
In a late 2018 agreement, ExxonMobil assigned a 62.674% working interest in Tract 32 of ADL 343112 to Jade, retaining a 2% overriding royalty interest. The following summer, BP assigned its 32.326% interest in the lease to Jade, retaining a 1.03% overriding royalty interest. Those two deals gave Jade 95% working interest in Sourdough, with ConocoPhillips Alaska Inc. holding the remaining 5%.
Through a farm-out agreement, Jade planned to drill an exploration well on the lease in early 2020. The company conducted preliminary permitting activities in early 2019 with a goal of drilling the Jade No. 1 exploration well in early 2020 using an ice road and ice pad. The results of the well would determine additional appraisal drilling in early 2021.
The approximately 12,750-foot well would penetrate “all of the prospective Brookian sand target that lay between 11,000 feet and the Hue Shale at 12,500 feet,” the company wrote in permitting documents. The company hoped to use Nordic Rig-3 for the well.
In mid-summer 2019, a delayed barge carrying a rig to the Point Thomson unit forced Jade to postpone its program by one year. In the company’s next plan of development, filed toward the end of the year, it pushed the timeline back again, the early 2022.
Then-Division of Oil and Gas Director Tom Stokes told Petroleum News at the time that the delay was the result of scheduling challenges associated with seasonally restricted tasks, like barging in equipment and ice road construction. Stokes said oil prices were not an immediate issue.
Even with those delays, Jade was still making progress.
“Generally speaking, we fully or partially achieved 92 percent of the goals [for 2019] … while 8 percent of the targets were missed. The misses were largely the result of new information provided by the second field study conducted by Jade to support appraisal operations,” the company wrote in March 2020 filing submitted to state regulators.
As an example, Jade noted that a Bathymetric survey of the PTU service pier approach showed the need for sea-bottom dredging in advance of the arrival of a land barge. With no time to do the work, let alone permit it, the company was forced to delay its campaign.
And toward the end of the year, Jade acquired the remaining 5% working interest in its lease from ConocoPhillips, giving the company 100% interest in Sourdough.
Obstacles Then came the upheavals of early 2020.
“Despite the COVID-19 situation and challenges imposed by a less than robust commercial environment in the Alaska oil industry we are largely on schedule with plans outlined in the 2nd Jade POD,” Erik Opstad told Petroleum News in October 2020.
In a third plan of development filed around that time, Jade described a range of permitting and preparatory activities through 2021 to support early 2022 drilling.
But then the company faced an unexpected obstacle.
The sale of BP Exploration Alaska Inc.’s North Slope assets to Hilcorp Alaska LLC complicated the final administrative transfer of 5% interest in the Sourdough lease. It took until July 2021 to resolve the uncertainty, late enough in the year that Jade was forced to delay its drilling again, this time until early 2023.
Even with the final transfer, some administrative kinks have persisted.
Associated with that 5% working interest is an NPSL (net profit share leases) development account worth more than $200 million. Jade is working with Hilcorp, ExxonMobil and the Department of Natural Resources to transfer the account, which would, according to Jade, “materially improve the calculated economics of the prospect.”
Jade hopes to avoid a similar administrative delay in the early months of this year, as Hilcorp takes over from ExxonMobil as the new operator of the Point Thomson unit.
Jade was also making the case for royalty modification and for House Bill 81, which would give the state the authority to reduce the 40% net profit share leases burden on ADL 343112 to the point that development becomes commercially viable.
Correlative rights also hang over Sourdough.
According to the 2018 seismic program, some 40% of Area F reserves fall within ExxonMobil leases. Those additional reserves would improve the economics of Sourdough, making it easier for Jade to secure financing for its proposed drilling campaign. But under the current arrangement, ExxonMobil indicated it would transfer additional resources to Jade only following a successful initial drilling campaign.
“We have somewhat of a chicken and egg scenario here,” Jade wrote in a recent POD.
“The bottom line is that Jade still cannot demonstrate that Area F can be commercially developed. Until that changes, the funding required to launch a development program will simply not be available. This is particularly true under the Biden Presidency given the political risk added to any Alaska oil and gas project by that administration,” Jade wrote, adding: “There are those that will argue that spending near $1 million to fully permit the Jade 1 appraisal well is a foolish undertaking unless the project is deemed commercially viable. However, given the lead time needed to obtain approvals on the complete permit package, Jade has been and will continue to be willing to accept the risk believing that eventually we will be able construct a commercial development scenario.”
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