Probably the most important news released by Oil Search Ltd. on Nov. 11 was confirmation that Oil Search Alaska has identified two major new trends (Quokka and Horseshoe/Stirrup) with similar scope and scale to Pikka (see map in pdf and print versions of this story).
But the news that was making headlines outside Alaska on Nov. 11 was that Oil Search Ltd.’s acting CEO Peter Fredricson told Dow Jones Newswires that Santos Ltd. likes the proposed Pikka oil development in Alaska, as opposed to much earlier indications that Santos was interested in selling a chunk of the project and letting the buyer (ConocoPhillips was inferred) operate the project.
As Oil Search and Santos continue to advance their proposed $6.5 billion merger., which will be voted on by shareholders on Dec. 7, Oil Search and its Alaska partner Repsol have been each looking to sell 15% of their stake in Pikka to provide funding needed for the phased oil development.
But Fredricson told Dow Jones, “As a merged entity there is less requirement for such a sell-down,” which would allow Oil Search to retain more of the value from the oil that is expected to flow from Pikka in the second half of 2025.
This news follows on the heels of unconfirmed rumors that a top Santos executive visited Anchorage in the last few weeks to meet with state officials and management in the Oil Search Alaska office.
Fredricson also said the Pikka sales process has been on the backburner since merger talks with Santos began.
Half-hearted backing
As part of the Santos takeover of Oil Search, an independent expert firm, Grant Samuel & Associates, was hired by Oil Search to advise its shareholders before they voted on the proposed merger.
If it goes ahead, the takeover of Oil Search would create a global top 20 oil and gas company and make Santos the largest shareholder in Papua New Guinea’s huge LNG project, which is operated by ExxonMobil.
In a report attached to the 700-page-plus merger document that went to shareholders Nov. 11, Grant Samuel said Santos’ offer, which will give Oil Search shareholders a 38.5% stake in the merged entity, did not fully reflect Oil Search’s underlying value, which it said was worth 43%-44% of the total value.
“There is clearly a risk that the funding and other strategic benefits do not fully compensate shareholders for this dilution,” Grant Samuel said in the report. “On the other hand, the options to maximize the value realized for Pikka and, over time, to optimize the development of its PNG interests are significant benefits of the merger that are not available to Oil Search on a standalone basis.”
So, since Oil Search faces real challenges in funding its growth opportunities on a standalone basis and faces “the real possibility that a standalone Oil Search would require equity support from its shareholders to maximize the value of its future development projects, … in the absence of a superior proposal,” Grant Samuel concluded that Oil Search shareholders were likely better off if the deal went ahead.
Pikka report
As part of its report to Oil Search shareholders, Grant Samuel appointed GaffneyCline to prepare an Independent Technical Expert’s Report on Oil Search’s Alaska assets, including the proposed Pikka development.
Although much of what was said in GaffneyCline’s report was reported in past issues of Petroleum News, there were some nuggets of new information, along with confirmation of where the Pikka project stands today with its owners, Oil Search, 51%, and Repsol, 49%.
As mentioned, first oil from Phase 1 of the Pikka project is expected to flow in the second half of 2025.
In its Alaska summary GaffneyCline said permits are being obtained for the Pikka unit, Quokka, Kooka, Thetis, Horseshoe Area, Lagniappe and Nanushuk West.
In its “Gross Valuation Scenario Volume” as of July 1, 2021, GaffneyCline wrote: “392 MMBbl Pikka Phase 1 development, 464 Other Development Pending, 112 MMBbl Development Unclarified.”
Formed in 2015, the Pikka unit consists of 89 different subsurface leases.
Pikka, operator Oil Search’s initial development project, targets oil deposits in the major Nanushuk and Alpine reservoirs. It was re-planned as a phased development to cut costs to first oil.
Phase 1 is only one of the original three drill sites, NDB, with downsized facilities. Its CAPEX estimate has been significantly reduced from $4.8 to $6.1 billion to $2.7 to $3.1 billion.
Gravel has already been laid for the processing facility, NPF, and NDB reducing forward costs.
Oil Search has high graded the project to a better reservoir at NDB. Breakeven cost of supply is now below $40 a barrel.
Oil Search has fully aligned with JV partner Repsol.
FEED entry occurred in February with the final investment decision planned by the first half of 2022 for Phase 1.
The company plans to spud Pikka development wells in July 2022.
Exploration in, outside Pikka
Oil Search acquired new acreage in the January 2021 State of Alaska lease sale as “a conveyor belt for future opportunities,” GaffneyCline reported.
In a segment on exploration, the firm said that “in addition to the core project scope, the Pikka development represents an aggregation point for future exploration, both in-field and regional. This includes satellite reservoirs in the Pikka unit, including the Nechelik, Nuiqsut, Kuparuk C, Torok, Tuluvak, as well as other Alpine and Nanushuk leads.”
Additional reservoirs are drillable from drill sites NDA, NDB or NDC within extended reach drilling constraints, GaffneyCline said.
“It is anticipated these volumes would be developed during production operations of the Pikka unit. Given the low incremental cost of development, these would be prioritized over new pad developments.”
In addition to the reservoirs drillable from NDA, NDB and NDC, “there are potential targets both inside and outside the Pikka unit which would require new pads to be developed. These include Pikka East and Pikka North areas. There are also several discovered and prospective exploration targets at Horseshoe which lie outside of the current Pikka unit,” GaffneyCline said, noting they include “three clinoform sands units, Diamond, Red Tail and Sulphur which Oil Search plans to target with a single exploration well.”
- KAY CASHMAN
