New Mustang financing
AIDEA agrees to new loan terms in support of the new oil field on North Slope Alan Bailey for Petroleum News
In a board resolution passed on Jan. 16, the Alaska Industrial Development and Export Authority agreed to change the terms of financing support for the development of the Mustang oil field on the North Slope, to accommodate delayed loan payments by Caracol Petroleum LLC, the field’s majority owner. Payments on the loan had been scheduled to begin in October but, following delays in the field startup, no payment was made. However, the field went into operation in November, according to data published by the Alaska Oil and Gas Conservation Commission.
Pioneering development Mustang is the first field on the North Slope to have been developed and brought online by a small independent oil company. And, while the multiyear saga of the Mustang development illustrates the challenges that a North Slope development can present for a small company, support for the development also fits within AIDEA’s mission of promoting commercial development within Alaska.
Brooks Range Petroleum Corp., a minority owner, operates the field. Caracol is owned by Singapore-based company Alpha Energy Holdings Ltd.
Scaled down startup Brooks Range had originally planned to start the field using permanent 15,000 barrels per day production facilities. However, following the oil price crash in 2014, the company had to put the project into “warm standby” mode before coming up with an alternative plan to install a modestly priced early production facility. The idea was to start production at relatively low rates and, then, as production ramps up, use the resulting revenue to upgrade the production facilities to a larger scale. And production has now started, following a delay of a few months in bringing the early production facility online.
The project was also impacted by Gov. Bill Walker’s veto of tax credits that the state owed in support of the development of the field operations center.
“The AIDEA mission to advance economic development and create job opportunities can sometimes run into delays, disappointments, and missed production deadlines,” said AIDEA Board Chairman Dana Pruhs when announcing the revised financing terms. “Brooks Range startup problems and the oil tax credits veto three years ago, along with other factors, created the largest workout situation at AIDEA as identified by the Dunleavy transition team in early 2019. Producing from these state oil leases in 2020 requires better understanding of North Slope challenges, reserve base lending, and capital requirements.”
$64 million loan AIDEA had originally been involved in Mustang as an investor in the development of the field’s access road, gravel pad and production facilities. However, in 2019 the agency restructured its investment into a loan. The loan of $64 million for the field development, together with $6 million in interest, amounted to around $70 million. The gross expected value of oil produced from the field is $1.3 billion.
Interest rate on the loan was 8%, to be paid in 29 level quarterly installments, starting on Oct. 1, 2019.
New loan agreement Under the new agreement, the interest rate has been reduced to 6%, with the first payment of interest deferred until three months after the closing of the new loan agreement. The end result of arrangements in the loan agreement will be a reduction in the loan principal to $63.6 million.
Initial payments on the loan will be interest payments only, with payments of principal plus interest starting in the seventh quarter of the payment schedule. Principal payments will accelerated, starting in the 14th quarter. AIDEA has also committed to make up to an additional $35 million in loan financing available after July 1 to support development drilling at Mustang. The additional financing is contingent on specific oil production targets being met and the establishment of a debt service reserve fund, AIDEA says.
Alpha investment needed The new loan arrangements are also contingent upon Alpha Energy Holdings investing $60 million in the Mustang project in the first quarter of this year and advancing at least $15 million to Caracol in the form of equity or a senior secured loan.
Alpha Energy Holdings must also take steps to strengthen the management and management oversight of the Mustang project.
AIDEA has consented to the sale of certain non-essential oil field equipment and other assets, so that the sale proceeds can be used to pay off debt due to creditors.
AIDEA says that other creditors are also agreeing to mechanisms for dealing with the Mustang situation, but that not all creditors have yet “come on board.” Final agreement is needed by the end of January, AIDEA says.
“I want to thank the AIDEA Board and Gov. Dunleavy for assigning a high priority to fixing this problem,” said Brooks Range CEO Majid Jourabchi. “Brooks Range and our contractors on the North Slope are completely aligned in what needs to be done, and the urgency to have it be so.”
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