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Oil and more oil
Oil Search’s 3 new North Slope discoveries pose challenge in current market Kay Cashman Petroleum News
When Oil Search established its Alaska office in March 2018 it started with three people. Today the company employs around 150.
In the next two years Oil Search drilled four new wells, increasing its Pikka/Horseshoe area contingent oil reserves from approximately 500,000 barrels to nearly a billion barrels.
At the end of March 2018 Alaska North Slope crude was selling on the West Coast in the high $60s per barrel and climbing. Today it is struggling to stay above $40 and even with spikes of good news about OPEC deals and COVID-19 vaccines, it has not managed to hit $49.
And to top it off, many financial institutions and several major oil companies that might have considered investing in Alaska projects in 2018 are not interested in the Arctic now - not even with all the high quality, light oil that North Slope explorers such as Oil Search and ConocoPhillips are finding.
In other words, it is a whole new world for Oil Search than it was two and a half years ago when the company first became a North Slope operator.
Added to the list above might be the fact Oil Search is the third largest leaseholder in Alaska, which likely puts some pressure on the company because of work commitments/expectations from state, federal and Native landowners, whose leases generally have terms of seven to 10 years.
News and clarifications In early December Oil Search Alaska COO Matt Elmer spoke to attendees of a Resource Development Council virtual meeting in Anchorage about the company’s plans for its Alaska leasehold, with special emphasis on its first big development, Pikka.
The most interesting updates in Elmer’s presentation and in the related emails between Petroleum News and Oil Search’s manager of U.S. media and communications Amy Burnett, include the following:
* Pikka phase 1 production peak of 80,000 barrels of oil per day will be reached “shortly after” startup in 2025 - exactly when in 2025 the company is not yet saying.
* Elmer and a resource map accompanying his presentation indicate the 2020 Mitquq exploration well (two penetrations) discovered a separate reservoir lying to the east and parallel with the Pikka Nanushuk reservoir, its tentative length and width similar to that of Pikka (see map in pdf or print version of this this story).
* The 2020 Stirrup exploration well also discovered a separate reservoir that lies west of both Pikka and the Horseshoe discovery - this is the well that had the highest flow rate, somewhere in the 3,800 barrel-a-day range, of any North Slope Nanushuk well that has been drilled from a straight hole with a single stage frac.
* Between 40 and 50 wells will be drilled during Pikka phase 1.
Meeting the challenges Oil Search, which turned 90 years old in 2019, has “a consistent history of growth in phases” that is “illustrated by the way the LNG projects in PNG were progressed,” Elmer noted. (As previously reported, Pikka has moved to a phased approach.)
“Alaska is clearly a long-term growth and investment area for Oil Search. Our plan is to be here for a long time. Pikka’s just the start. … We have a number of opportunities to develop after Pikka,” he said.
Regarding 2020, Elmer said, “I think we are all looking forward to it passing us by and getting into 2021.”
But Oil Search had a very successful 2020 in terms of resource growth and tackling current market conditions.
For example, significant discoveries at Mitquq and Stirrup de-risked resources in the Quokka and Horseshoe trends.
2020 also saw an increase in Oil Search’s confidence in Pikka due to well and seismic results, Elmer said.
A slide accompanying his presentation said the company saw additional potential Pikka resource in the Nanushuk, Alpine and Kuparuk reservoirs.
Lowering costs In 2020 Oil Search was “introduced to quite a bit of challenge with COVID, the consequences being a low oil price and a complete shift in the oil price environment,” Elmer said.
“When you put those two things together - a growing resource and a lower price - we’ve had to look hard (asking)… how do we approach it differently to make it more robust in a low oil price world.”
First, Elmer said, the company focused on improving the project’s resilience, its breakeven cost. They were able to lower it to “something below $40 a barrel.”
“We’re very comfortable at that breakeven cost moving this project forward,” although, he said, they would be happier “getting it down to $35 per barrel,” so they’re still looking at “other options.”
The other piece “we focused on was reducing the near-term expenditure. The original project, which was the three drillsite, 120,000 barrel a day approach was a $6 billion investment. And given where prices were and the way the environment was shaking out, that was too steep to take on, so the company decided on a phased approach with one drillsite initially, dropping the upfront expenditure to $3 billion and starting with 80,000 barrels a day.”
How to build it “The other piece we did was we also shifted our focus on how we’re going to build our facility,” Elmer said.
Traditionally on the North Slope companies “go with large, custom-built sealift processing facilities, so we’re pivoting a bit and we’re going to move to more of a smaller module and truckable facilities and a much more standardized design versus a custom design. And that’s allowing us to drive costs down quite a bit. And it also reduces our risk and uncertainty both on cost and on schedule,” Elmer said.
“Once we come online we’ll have self-funding growth … as we move forward with the project,” he said.
Editor’s note: See part 2 of this story in the next weekly edition of Petroleum News.
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