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Vol 21, No. 21 Week of May 22, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

The Explorers 2016: Armstrong Oil & Gas takes over North Slope project

A late 2015 acquisition gives independent majority control of Pikka unit


For Petroleum News

During its two decades in the state, Armstrong Oil & Gas Inc. has demonstrated two successful models for how a small independent company in Alaska can carry a prospect from exploration into development: find a bigger partner or find a smaller field.

Now, Armstrong is facing a third option: being the bigger partner at a bigger field.

Toward the end of 2015, the Denver-based company acquired a majority stake in the North Slope holdings of Repsol E&P USA Inc. in a deal worth more than $800 million.

The deal followed four seasons where the two companies (and their partner GMT Exploration Co. LLC out of Denver) partnered on an ambitious exploration program focused primarily within the “billion-dollar” fairway between the Kuparuk River and Colville River units. With Repsol as operator, the joint venture drilled 16 wells.

The joint venture also held more than 750,000 acres across the central North Slope, which held out the promise of even greater exploration activity in the years to come.

In that partnership, Armstrong had a 45 percent interest in the exploration acreage and a 30 percent interest in the development acreage. Following restructuring, Armstrong has a 75 percent interest and operatorship in the exploration acreage and a 45 percent interest in the development acreage with an option to acquire another 6 percent and operatorship.

Before the deal was announced, development seemed inevitable, given that the companies had spent nearly $1 billion in the region and were touting favorable results.

All 16 wells drilled found oil and most found oil in multiple zones, according to Armstrong. A third-party report from the engineering firm DeGolyer and MacNaughton estimated “C1” reserves of 497 million barrels of oil, “C2” reserves of 1,438 million barrels and “C3” reserves of 3,758 million barrels. The report uses “contingent” reserve classifications, which Armstrong said would be converted to more traditional Proven, Probable, and Possible figures “where appropriate upon the final investment decision.”

Mark Myers, then commissioner of the Alaska Department of Natural Resources, told Petroleum News in February: “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.”

(The “discovery,” Myers was careful to note, was “multiple different reservoirs, not just one major reservoir as in the case of the original Kuparuk and Alpine discoveries.”)

Now, Armstrong is leading that project forward. In late February 2016, the U.S. Army Corps of Engineers began scoping a proposed Nanushuk project at the Pikka unit. And Armstrong is planning an appraisal well this coming winter: in late 2016 and early 2017.

Big partners

Armstrong is responsible for the two of the most successful North Slope exploration campaigns of the last 25 years. After arriving in the state in the late 1990s, the company drilled several exploration wells in the state waters north of the Kuparuk River unit.

Those wells discovered promising oil fields. But instead of tackling development, Armstrong attracted larger partners to take the lead and eventually take over the projects.

Pioneer Natural Resources Alaska Inc. brought the Oooguruk unit into production in 2008, and Eni Petroleum brought the nearby Nikaitchuq unit into production in 2011.

Those two oil fields are the only newly producing units on the North Slope over the last decade and are also the first two units on the North Slope operated by a company other than BP Exploration (Alaska) Inc. or ConocoPhillips Alaska Inc. (and their predecessors).

In 2007, Armstrong acquired the North Fork unit, a Cook Inlet natural gas field in the southern Kenai Peninsula discovered in the 1960s but never developed. After assembling a joint venture of small independent companies and building a pipeline, Armstrong brought the unit into sustained production and later sold it to Cook Inlet Energy LLC.

As Armstrong was developing North Fork, the company was also amassing a new North Slope position through an affiliate called 70 & 148 LLC - named, optimistically (and now, given its potential discoveries, a tad prophetically, too), after the coordinates of the Prudhoe Bay field. Armstrong brought the Spanish major Repsol YPF to Alaska in March 2011. Repsol acquired a 70 percent interest in 494,211 acres across the North Slope and planned to spend around $768 million, with the vast majority going toward exploration.

The program was the most extensive campaign on the North Slope over the past five years - 16 wells or sidetracks, two 3-D seismic surveys and the formation of the offshore Qugruk unit and the Pikka unit along the Colville River Delta. In November 2014, as preliminary results of the program were becoming clear, Armstrong Vice President Ed Kerr said, “In 10 or 15 years people will talk about Repsol the same way they talk about BP and ConocoPhillips today, in terms of … contributing to Alaska’s economy.”

In mid-2015, the partners provided more detailed results for the first time. According to Armstrong, two wells from in 2015 and two wells from previous seasons targeted the “East Alpine” field and “encountered oil productive Alpine sand in excess of 95 feet thick at a depth of 6,500 feet with porosities ranging from 15 percent to 25 percent. Well control and seismic data indicates the oil pool covers an area in excess of 15,000 acres.”

Another seven wells in the “Nanushuk reservoir” had “proven an oil pool that covers more than 25,000 acres, at a depth of 4,100 feet, with an oil column of 650-plus feet, and up to 150 feet of net pay with an average porosity of 22 percent.” While the companies said they needed more wells to “confirm the ultimate size of some discoveries, this season’s results justify moving forward with development,” according to Armstrong, which said the companies were permitting developments in the Nanushuk and Alpine.

Accelerating development

By the time Repsol announced the sale, it was already permitting a fifth season.

In fact, on the same day as the announcement, the Alaska Department of Natural Resources began taking comments on a two-to-three-well drilling program Repsol was permitting in the Pikka unit region for this coming winter. Instead, the companies deferred those plans, while suggesting they would pursue development in the future.

According to Armstrong, even with the deferment, permitting will continue on a three-pad development with estimated production on the order of 120,000 barrels per day.

The current plan of exploration for the Pikka unit calls for Repsol - presumably through Armstrong - to license and reprocess the existing North Island 3-D seismic survey, conducting rock physics studies and performing stratigraphic analysis and special core analysis on the three exploration wells that Repsol drilled at the unit in early 2015.

In February 2016, Armstrong President Bill Armstrong told Petroleum News that the partners would accelerate development of their Pikka unit, with production by 2021. An early description calls for three gravel pads with standalone processing facilities and as many as 76 production and injection wells, in addition to associated infrastructure.

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