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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2018

Vol. 23, No.21 Week of May 27, 2018

The Explorers 2018: Oil Search takes over at the Nanushuk development

The ASX-listed independent partners with Armstrong to tackle one of the biggest Alaska discoveries in decades

Eric Lidji

for Petroleum News

Oil Search Ltd. became the newest operator in Alaska in mid-March 2018, when the Division of Oil and Gas and Arctic Slope Regional Corp. approved the transfer of working interest at the Pikka and Horseshoe prospects from Armstrong Energy LLC.

The independent with offices in Australia and Papua New Guinea acquired a 25.5 percent interest in the Pikka unit and adjacent exploration acreage and a 37.5 percent interest in the Horseshoe block and the Hue shale for $400 million, according to information that the company provided to analysts in November 2017, when it announced the acquisition.

Oil Search described the $400 million price as a low-cost entry into Alaska “made at an attractive time in the commodity cycle.” According to the company, the price equates to $3.10 per barrel, with potential resource upside reducing the cost to $1.30 per barrel.

At the time, Oil Search also announced an option, through June 30, 2019, to acquire an even larger interest in the project. For an additional $450 million, the company could acquire Armstrong’s remaining 25.5 percent and partner GMT Exploration’s remaining 37.5 percent interest in the Pikka unit and the Horseshoe block, as well as an additional 25.5 percent interest in adjacent exploration acreage and 37.5 percent in the Hue shale.

Oil Search has taken over the Armstrong offices in downtown Anchorage, expanding them to accommodate a staff of 110 people, and said it “will form a long-term partnership with Armstrong, leveraging its technical capabilities and experience in the identification of additional potential growth opportunities in Alaska.”

Upcoming plans

At the time of the announcement, Armstrong was planning to drill the Pikka No. 2 well and Pikka No. 2A sidetrack in the southern portion of the Pikka unit this winter, although it is not yet clear where Oil Search will drill next winter.

The company described the program as a delineation campaign with the potential to prompt revisions to early engineering and design work and reservoir modeling that was already underway at the Nanushuk development project planned for the Pikka unit. The company proceeded with early facility design before finalizing subsurface design “in an effort to progress the Nanushuk project as expeditiously and efficiently as possible.”

The Alaska Oil and Gas Conservation Commission issued permits for Pikka No. 2 and Pikka No. 2A in late December, after Armstrong and partner GMT Exploration Co. LLC announced a pending sale of a portion of their interest in the project to Oil Search Ltd.

Armstrong decided in mid-January 2018 to defer the delineation program for a year. The company had made a similar decision the year before, cancelling its Pikka No. 1 well at the request of local community groups. In both cases, the decision to defer work plans was tempered by an information sharing agreement with ConocoPhillips Alaska Inc.

The agreement proved to be moot last year because ConocoPhillips also deferred drilling plans in the region, pushing off its proposed Putu well. The agreement is more likely to be useful this year, given that ConocoPhillips could risk losing acreage if it fails to drill and, at this writing in early April, was reportedly finished drilling Putu No. 2 and 2A wells (not confirmed by ConocoPhillips).

Partners

Armstrong is known in Alaska for bringing on interesting partners. Historically the Denver-based company has preferred to operate on equity rather than on debt and has preferred to discover and prove up resources rather than operating development programs, which explains why the company has been interested in teeing up projects for other players.

To date, four companies have been involved in the Pikka project.

Working with Denver-based independent GMT Exploration Co. LLC, Armstrong acquired a swath of mostly onshore acreage across the central North Slope in 2008 and 2009. They persuaded the Spanish major Repsol YFP to join the project in 2011.

Under the deal, Repsol acquired a 70 percent interest in 494,211 acres across the North Slope and announced plans to spend around $768 million, mostly on exploration. The joint venture eventually increased both its land position and its budget, leasing some 750,000 acres across the North Slope and spending about $1 billion on activity. As operator of the joint venture, Repsol drilled 16 wells and sidetracks, commissioned two 3-D seismic surveys and formed the Qugruk and Pikka units in the Colville River Delta.

After announcing a major discovery in the Alpine and Nanushuk formations over the latter half of 2015, the joint venture began permitting a development at Pikka by launching an environmental impact statement with the U.S. Army Corps of Engineers.

All signs pointed toward a quick development decision. But somewhat unexpectedly, the joint venture reorganized. The shuffle essentially flipped the arrangement, turning Armstrong into the operator and majority owner and giving Repsol a minority stake.

In early 2017, as the new operator, Armstrong drilled the Horseshoe No. 1 well and No. 1A sidetrack some 20 miles south of the Pikka unit, near a horseshoe bend in the Colville River. After completing the wells, Armstrong increased its previous discovery estimates.

With regulatory approval in late March 2018, Oil Search became the operator of the Pikka unit, while Repsol retained its 49 percent minority interest.

Oil Search

Although unknown in Alaska, and not particularly well known on the international stage, Oil Search is an old hand by industry standards. The company was founded in 1929 and has partnered with ExxonMobil and Total in two major liquefied natural gas operations in Papua New Guinea, as well as being operator of all producing oil wells in the country.

Oil Search estimated it would cost some $4 billion to develop an oil resource of some 500 million barrels. The figures describe the first phase of a larger development, according to the company, with initial activities yielding first oil from the Nanushuk as early as 2022.

As described by Armstrong Energy geologist Colby VanDenburg at the Resource Development Council conference on Nov. 15, 2017, the joint venture is envisioning a development with some 146 wells from three drilling pads east of the Colville River. The project would require some 35 miles of pipeline, 25 miles of road and a central processing facility with the capacity to handle some 120,000 barrels of oil per day. The program would target the Nanushuk with a secondary target in the Alpine C sands.

Oil Search said it would fund much of its new Alaska venture through surplus cash. The company is reporting liquidity of $2 billion - $1.2 billion in cash and $850 million in undrawn corporate facilities. The company estimated that its equity funding requirement for the proposed $4 billion development project would be around $300 million to $400 million, payable over a three-year construction period. The company expected project financings to be readily available, given the stability and maturity of the Alaska industry.

A major find

Oil Search told analysts it had made its deal on the basis of some 500 million barrels of recoverable oil but noted that Armstrong offered estimates surpassing 1 billion barrels.

Either way, the figures acknowledge the magnitude of the discovery.

With the exception of a few vague comments made at earnings calls and industry conferences, the Repsol-led joint venture remained tight-lipped about its progress until mid-2015, when it announced discoveries in the East Alpine and Nanushuk formations.

It soon became clear that the joint venture had made a potentially historic discovery. The companies reported proven contingent oil reserves of 497 million barrels, probable contingent reserves of 1.4 billion barrels and possible contingent reserves of 3.7 billion barrels. They estimated that the field could produce 120,000 barrels per day, which would singlehandedly increase throughput on the trans-Alaska oil pipeline by nearly 25 percent.

And the nature of the play offered the potential for those numbers to grow. The Nanushuk and Alpine formations represented just two of the six notable horizons present in the region. And the companies had only explored about 10 percent of their total leasehold.

Armstrong founder and top executive Bill Armstrong described the Nanushuk discovery as “a new and different play for the North Slope,” with thicker pay found at shallower depths. “That’s what makes it so exciting. Nobody has seen this formation productive in this depositional environment before. You look at how thick it is, how good the oil is, how good the reservoir is - it all bodes really well for the play,” he said in early 2016.

Enthusiasm quickly spread. Responding to the company-provided estimates, then-Alaska Department of Natural Resources Commissioner Mark Myers noted in February 2016 that “the proven contingent oil reserve number makes the discovery the largest since the Alpine field, the probable contingent reserve number the largest since the Kuparuk field, and the possible contingent number makes the discovery the largest since Prudhoe.”

At an Alaska Geological Society meeting in mid-April 2016, U.S. Geological Survey geologist Dave Houseknecht said that the Nanushuk discovery revealed the possibility of undiscovered oil resources along a fairway extending perhaps 100 miles to the west, referring to the find as “pretty astounding.”

According to VanDenburg, the thick sands that form the Pikka reservoir can be traced along a zone more than 40 miles wide, which explains why Armstrong drilled its Horseshoe exploration well some 21 miles to the south. By comparing the Horseshoe well to previous wells drilled to the north, the company was able to confirm the existence of a single large oil field with the potential for more than 10 billion barrels of oil in place.

“When you’re chasing fields of that size, it changes everything,” VanDenburg said.






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