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Vol. 26, No.45 Week of November 07, 2021
Providing coverage of Alaska and northern Canada's oil and gas industry

Jade’s goal to make Sourdough development economically viable

Kay Cashman

Petroleum News

On Nov. 1, Jade Energy, operator of Area F, Tract 32, in ADL 343112 in the eastern North Slope Point Thomson unit filed its fourth plan of development for its Sourdough project with Alaska’s Division of Oil and Gas.

The proposed POD covers the 2022 calendar year, starting Jan. 1.

Jade’s top priority in 2022 is to make the Area F development of the Sourdough prospect commercially viable. Although “considerable progress” is being made on that front, Jade said it is still unable to show a positive net present value, or NPV, for the project, without which the independent will not be able to raise funds from investors.

Area F consists of approximately 7,647 non-adjacent acres in the northeastern and southeastern corners of the PTU. Jade, by agreement with ExxonMobil Alaska Production is majority owner and operator of PTU Tract 32, ADL 343112, in the southeastern portion of Area F.

Potential Brookian reservoirs have been encountered by numerous wells drilled in and near the PTU since the 1970s.

Tract 32 holds two of the mid-1990s oil discovery wells, Sourdough 2 and 3. In 1997 BP, who drilled the wells, estimated the prospect held 100 million barrels of recoverable oil.

In addition to the data derived from these wells, various 3D seismic surveys have been acquired and interpreted over lands contained in Area F. In addition to the vintage data, Jade acquired new compressive sensing imaging seismic 3D data from the area during the 2017–18 winter season with parameters optimized to characterize Brookian strata.

Based on its interpretation of data, Jade planned to drill an appraisal well on ADL 343112, Section 32, in winter 2021 utilizing existing PTU infrastructure to conduct its operations, supported by the construction of additional Jade infrastructure as required to access the well site. But the COVID-19 pandemic delayed those plans.

Oil price one factor

As the beginning the proposed fourth POD period approaches, Jade has “both good news and some not so good news to consider,” the company said in its Nov. 1 filing.

“As to the good news, at the end of October 2021 we see the price of ANS crude closing in on $90 per barrel with an upward trend. Such pricing is certainly constructive as Jade works to foster a positive … NPV for the Area F development project,” the company said.

“Further good news is that funding is readily available, if the development project can be shown to be commercially viable.”

Unfortunately, the price of Alaska North Slope oil is not the only driver that determines the economic viability of a North Slope project.

‘Largely un-investable’

According to 2020 economic modelling jointly conducted by Jade and the Alaska Department of Natural Resources/DNR, the project has a negative net present value, or NPV.

As such, Jade said, the Area F development project is “largely un-investable” for investors.

From Jade’s perspective, the transformation from a non-commercial to commercial project is only possible if some combination of the following occurs:

A. Implementation of NPSL Bill HB 81 - HB 81 passed the Alaska House earlier this year but became mired down in the Senate Finance Committee. The legislation must be passed by the Senate and signed by the governor. Then, with this new authority the Alaska Department of Natural Resources can reduce the 40% net profit share leases, or NPSL, burden on ADL 343112 to the point that development becomes commercially viable.

Jade suspects that “some adjustment to the standard 12½% royalty will also be needed to achieve a materially positive NPV,” but that is a result that Jade, and DOG/DNR can hammer out given the legislative leeway to do so.

B. Transfer the NPSL development account balance from Hilcorp to Jade - At the end of July, Hilcorp transferred its remaining 5% interest in ADL 343112 to Jade. Associated with that interest is a development account balance originally credited to BP, but later passed to Hilcorp after the sale of the ADL 343112 working interest by BP to Hilcorp.

Jade said it’s currently working with Hilcorp, ExxonMobil and DNR to implement a transfer of the account balance to Jade. Such a transfer, of “something above $200 million believed to be in the account, would materially improve the calculated economics of the prospect.”

C. Add reserves to development project. - Based on the evaluation of 3D seismic shot by Jade and its partners in 2018, approximately 40% of Area F reserves are on ExxonMobil leases. Under the farmout agreement and in subsequent related documents, ExxonMobil “has indicated their intent to transfer additional resources to Jade following success with the initial drilling operations.”

Unfortunately, Jade said in its proposed fourth POD, “we have somewhat of a chicken and egg scenario here. Materially increasing the reserves considered by the economic model would likely help flip the project from a non-economic to an economic project which would meet investor expectations.”

But as things stand now, ExxonMobil will not work the issue until after Jade’s investors have spent as much as $40 million to drill the first producer.

Erik Opstad thinks there are probably ways for the two companies to work out a compromise on reserve assignments, but that issue clearly is an element that must be addressed before the independent can justify rig mobilization, he told Petroleum News Nov. 1.

Opstad, who oversees Jade’s operations in Alaska and is a 50% owner, is a state of Alaska certified professional geologist who has worked the North Slope for 36 years, including a stint with BP in various roles and as a principal and general manager of Savant Alaska. He currently heads up operating subsidiaries of 88 Energy in Alaska.

Economic enhancement

In 2022 Jade intends to focus on evaluating the implications offered by a new Reserves & Economics Report being authored by PRA for consideration in first quarter 2022.

“We have also engaged Worley to generate preliminary FEED work on a 10,000 Bbl./day processing facility,” Jade said.

Such reports are “key in further evaluating project economics and in raising money for the initial drilling effort,” Jade said.

The company also expects to work with ExxonMobil and Hilcorp to optimize PTU development opportunities as they present themselves.

“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 said in its proposed 4th POD.

Permitting on-going

Continuing to work on permitting is another goal of the fourth POD.

“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,” Jade said in its proposed fourth POD. “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.”

In 2022 under the fourth POD, Jade intends to focus on getting a permit to drill submitted to and approved by the Alaska Oil and Gas Conservation Commission.

Bathymetric survey, mobilization

Under its proposed fourth POD Jade will continue to conduct an annual bathymetric survey of the PTU service pier approach in case it has to move a drilling rig into the area by barge.

Mobilization by barge remains the “most plausible scenario for a large rig” given the high cost of ice road construction, Jade said.

The company will continue to monitor the bathymetric conditions on approach to the service pier to ensure that it remains useable, however Jade has removed screeding or dredging operations from its fourth POD. That permit remains viable, but the need to work an estimated 0.6-acre of sub tidal seafloor within a 2.25- acre channel (650-feet by 150-feet) to an elevation of -6 feet mean lower low water is no longer required, for now, the company said.

The 2021 mobilization planning was not worked as intensely as originally intended during the third POD because of the full onslaught of the COVID-19 pandemic in the spring of 2021.

Jade said, “it became clear that Jade 1 drilling would be delayed at least a year and potentially to 2023 given the pandemic’s impact on various supply chain elements coupled with funding challenges due to ANS crude price weakness.”

In 2022 Jade intends to pre-stage materials and equipment into Point Thomson using snow road access and techniques developed by Opstad’s ELKO International in the National Petroleum Reserve-Alaska for 88 Energy.

Looking at modular rigs

For completeness, Jade is also looking at several modular rigs that could be transported to the Jade 1 drill site entirely by snow road. Rig selection will be made based on drilling requirements dictated by the final well design, the company said.

The exploration program Opstad ran for 88 Energy in NPR-A was a game changer for North Slope exploration in terms of saving time and money.

The shallower Nanushuk wells do not require the use of a rotary rig, or an ice road which is needed to transport the heavier traditional North Slope exploration rigs, allowing 88 Energy to use a less expensive lightweight workover rig that could be moved off-road in pieces by tundra-safe track vehicles on snow trails.

One more challenge?

Another potential hurdle was recently added to the Area-F development. On Oct. 22, ExxonMobil announced that on Jan. 1, it would turn over PTU operatorship to Hilcorp.

The question now, Jade wrote in its’ proposed POD, is “how much chaos will that transfer introduce and how will the change in operatorship impact Jade’s schedule as outlined in the 4th POD?”

A change in PTU operatorship “will most certainly be disruptive for some months going forward,” but it shouldn’t alter its 2022 plans, Jade said.

- KAY CASHMAN



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