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Vol. 26, No.44 Week of October 31, 2021
Providing coverage of Alaska and northern Canada's oil and gas industry

Oil Search pushes on

Applies to form Alaska North Slope Horseshoe unit, sell-down effort continues

Kay Cashman

Petroleum News

On Oct. 26 Alaska’s Division of Oil and Gas posted an Oct. 22 revised application from Oil Search Alaska to form a 150,556-acre Horseshoe unit. The application, which was made on behalf of working interest owners Oil Search (51%) and Repsol E&P USA (49%), was also filed with the federal Bureau of Land Management.

If approved, 40 state leases and 12 federal leases will be in the proposed unit west of the central North Slope (see map in pdf and print versions of this story).

Unitization will save several leases from expiring in 2022.

Oil Search asked the division to approve the unit formation effective Oct. 1 when it filed its original application.

The 245-page filing also contained a detailed Horseshoe unit operating agreement between Oil Search and Repsol (and any parties buying into the unit) and a five-year plan of exploration.

Development of the proposed unit area will include one or more drill sites, pipelines and processing facilities, Oil Search said in the application.

The 52 leases included in the proposed Horseshoe unit have been explored directly by four wells, Oil Search said:

* Horseshoe 1 and 1A, drilled in 2017.

* Stony Hill 1, drilled in 2018.

* Stirrup 1, drilled in 2020.

Except for Stony Hill 1 which was drilled by ConocoPhillips Alaska, all the wells were drilled by Oil Search or its partners.

All the wells discovered oil, collectively identifying producible reservoirs in three different horizons of the Nanushuk formation.

Several additional wells were drilled nearby that are significant for demonstrating the prospectivity of the Nanushuk formation within the proposed Horseshoe unit area, Oil Search said in the unit application.

Stirrup 1 well

Stirrup 1, which was presumed to have discovered a separate reservoir, is a direct analogue to the Horseshoe 1 Nanushuk discovery and as such Oil Search previously said it could underpin a possible standalone Horseshoe development. Approximately 7-1/2 miles west of the 2017 Horseshoe 1 discovery well and almost 28 miles southwest of Oil Search’s proposed Pikka unit development, Stirrup 1 successfully penetrated the Nanushuk reservoir and encountered an oil column with a net pay of 75 feet.

The wellbore was cored, perforated through a single-stage simulation and shut-in for six days to enable pressure buildup prior to testing in which it flowed at a stabilized rate of 3,520 barrels of oil per day, exceeding company expectations and setting a record for a North Slope Nanushuk well that has been drilled from a straight hole with a single stage frac.

USGS geologist Dave Houseknecht previously pointed out that in an Oil Search publication the company had said Stirrup 1 was at the northern end of a seismic anomaly.

Pikka, a 77,744-acre unit, is expected to begin phase one oil production in 2025, quickly reaching 80,000 barrels a day. That schedule has likely slipped with the proposed Oil Search Ltd./Santos merger that Oil Search shareholders are expected to vote on before the end of the year.

Unit plan of exploration

“In addition to drilling multiple discovery wells within the proposed unit area, the WIOs and their predecessors in interest have conducted other major exploration activities. These activities are described in more detail in the confidential Attachment A, and include acquisition of two different 3D seismic surveys covering several hundred square miles (Horseshoe 3D and Kuukpik 3D), licensing of additional seismic datasets, and extensive work assembling, reprocessing, merging, and improving these datasets,” Oil Search noted in the application.

The initial five-year unit plan of exploration commits the working interest owners to drill one new well in the southern portion of the new Horseshoe unit area and do seismic processing that includes interpretation of recently acquired 3D seismic and integration of it into previously acquired 3D seismic datasets, well-tie analysis, and extensive static and dynamic modeling.

The plan of exploration will have to be approved by the division.

Horseshoe leases, over-rides

The state leases included in the map in the pdf and print versions of this story are as follows: Tract 1, ADL 392345, 2560 acres; Tract 2, ADL 392346, 2492.4 acres; Tract 10, ADL 392041, 3553.59 acres; Tract 11, ADL 392044, 4419.86 acres; Tract 12, ADL 392043, 2384.03 acres; Tract 15, ADL 392049, 2139.85 acres; Tract 16, ADL 392048, 4916.44; Tract 17, ADL 392055, 1440 acres; Tract 18, ADDL 392054, 1440 acres; Tract 19, ADL 392051, 1440 acres; Tract 20, ADL 392050, 1360.46 acres; Tract 21, ADL 392047, 4061.35 acres; Tract 22, ADL 392046,3840 acres; Tract 23, ADL 392045, 3687 acres; Tract 24, ADL 392042, 4099.06 acres; Tract 26, ADL 392052, 1366.35 acres; Tract 27, ADL 392053, 1440 acres; Tract 28, ADL 392056, 1440 acres; Tract 29, ADL 392057, 1440 acres; Tract 30, ADL 392010, 1440 acres; Tract 31, ADL 392009, 1440 acres; Tract 32, ADL 392014, 1440 acres; Tract 33, ADL 392013, 1372.50 acres; Tract 34, ADL 392005, 1439.34 acres; Tract 35, ADL 392004, 1440.42 acres; Tract 36, ADL 392008, 5630 acres; Tract 37, 392003, 5665.14 acres; Tract 39, ADL 392006, 1140.60 acres; Tract 40, ADL 392007, 1440 acres; Tract 41, ADL 392015, 1377.50 acres; Tract 42, ADL 392016, 1440 acres; Tract 43, ADL 392011, 1440 acres; Tract 44, ADL 392012, 1440 acres; Tract 45, ADL 393553, 1440 acres; Tract 46, ADL 393552, 1440 acres; Tract 47, ADL 393549, 1440 acres; Tract 48, ADL 393548, 1384.50 acres; Tract 50, ADL 393555, 1440 acres; Tract 51, ADL 393529, 1440 acres; Tract 52, ADL 393531, 1440 acres.

The federal leases in the Horseshoe unit map are as follows: Tract 3, AA 093130, 6414 acres; Tract 4, AA 093132, 5727 acres; Tract 5, AA 093134, 5124 acres; Tract 6, AA 093133, 5763 acres; Tract 7, AA 0901, 3720 acres; Tract 8, AA 093135, 4853 acres; Tract 9, AA 093128, 8061 acres; Tract 13, AA 093126, 5086 acres; Tract 14, AA 093125, 4294 acres; Tract 25, AA 093127, 7270 acres; Tract 38, AA 092134, 5732 acres; Tract 49, AA 094396, 7167 acres.

Again, as of Oct. 1, Oil Search held a 51% working interest in all the leases in the proposed Horseshoe unit and Repsol held a 49% interest.

In the state leases, overriding royalty holders were J. Andrew Bachner, Keith C. Forsgren, Three Mountain Oil LLC, Stephen M. Hosmer, Donald H. Hosmer, Abdel-Rahman Family Trust, Royale Energy Inc., Kerr Family LLC, Brix Royalty LLC, Kerr Family 2016 GST Trust, Big Bug LLC, Honey Hole Royalties LLC, Xavier Resources LLC, Sumo LLC, Arete Enterprises LLC, Reed LIGC LLC, Smida Royalty LLC, and GMT North Slope Royalty Company II, LLC. None of the overriding royalty lease holders hold more than a 3.28008% interest and most hold a fraction of 1% of a lease.

In the federal leases, overriding royalty holders were Kerr Family LLC, Brix Royalty LLC, Kerr Family 2016 GST Trust, Big Bug LLC, Honey Hole Royalties, LLC, Xavier Resources LLC, Sumo LLC, Arete Enterprises LLC, Reed LIGC LLC, Smida Royalty LLC, and GMT North Slope Royalty Company II LLC.

None of the overriding royalty lease holders on the federal leases hold more than a 1.45781104% interest and most hold a fraction of 1% of a lease.

Doing well financially

On the financial front, in the third quarter ending Sept. 30, Oil Search Alaska’s parent, Oil Search Ltd., benefited from a surge in oil and LNG prices and its $US3 billion Alaska North Slope Pikka project has survived with a mere one quarter delay in making a final investment decision.

The FID was moved from last quarter of this year to first quarter of next year - after Oil Search shareholders vote on the proposed merger with Santos Ltd. The two companies’ boards have signed a merger agreement that would give Santos shareholders 61.5% of the new entity’s shares and Oil Search’s shareholders 38.5%.

A team from each company, along with financial advisers, is studying the proposed merger but as one Oil Search executive said, “with some 1,280 employees in Oil Search today, less than 50 of them are working, working - very hard I might add - on the Santos merger proposal. The other 1,230 are working very hard every day for Oil Search shareholders, delivering every day the results that we have tabled today.”

Oil Search’s third quarter revenue rose 12% to $US409 million from second quarter with LNG prices increasing 16%. Oil production was up 5% from the previous quarter at 6.9 million barrels of oil equivalent.

The merger requires the approval of at least 75% of the shareholders at a Nov. 29 meeting, and there have been unhappy rumblings from several institutional Oil Search shareholders, who collectively might be able to kill the deal.

Dingeman update

Bruce Dingeman, president of Oil Search Alaska and executive vice president of Oil Search Ltd., told listeners in a third-quarter presentation and conference call on Oct. 26, that the company “entered FEED on the Phase 1 Pikka project early this year and are now nearing completion of that work. We have advanced engineering and design of our modularized processing facility, seawater treatment plant, drill site facilities and operations center.”

Dingeman said the “contracting process is progressing to plan, and we will be positioned to begin key contract awards following FID.”

Furthermore, Oil Search Alaska is on schedule with obtaining the permits it needs to move forward with the Pikka development. It has “secured major permit approvals, including surface access privileges, from Kuukpik via a landmark land-use agreement and a US Corps 404 Permit Federal Authorization.”

Dingeman pointed out that the Pikka Phase 1 project ranks in the “top quartile position” among other greenfield development projects according to analysis by Wood Mackenzie, making Pikka a “compelling investment in the energy transition era.”

The Pikka project “is well-placed for delivery, with civils infrastructure for Phase 1 already in place,” he said.

“Our key project attributes are in line with previous estimates, as our economic metrics are shown on the display of greater than 20% IRR, less than $40 per barrel breakeven cost of supply, including a 10% return. These returns are driven by the approximate 400 million barrels of 2C resource figure and associated 80,000 barrel of oil per day plateau production rate,” Dingeman said.

The focus now is to “reduce ownership levels across the project through equity sell-down and infrastructure funding options, while satisfying the capital requirements.” (Oil Search and Repsol have each said they wish to bring in a third partner, selling 15% of each of their holdings in Pikka.)

In a third-quarter release, the company said “In Alaska, 75% of our team have been hired from within Alaska itself. We are the second largest oil and gas leaseholder in Alaska, and phase 1 of our Pikka project is expected to deliver in the order of $7 billion in taxes and royalties to the state and Native landowner companies over time,” noting that more than 60 environmental studies have been done on the Pikka project to date.

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