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Vol. 28, No.49 Week of December 03, 2023
Providing coverage of Alaska and northern Canada's oil and gas industry

Pikka 30% complete

Gallagher: Phase 1 to come online in early '26, game changer for Santos

Kay Cashman

Petroleum News

At its Nov. 22 Investor Day in Sydney, Mark Ireland, Santos senior vice president subsurface and exploration for Alaska, said the Pikka Phase 1 project is now 30% complete, with five wells drilled and the second completion under way. Pikka Phase 1 is exploiting the heart of the Nanushuk 2 and 3 reservoirs.

(See chart in the online issue PDF)

"It's early days yet ... but the results to date are looking great. ... As I stand here today, I call Pikka Phase 1 30% complete a little over a year after FID. We'e building our foundation for future phases as well," he said, mentioning Pikka Phase 2, Quokka (Mitquq) Phase 1 and 2, and Horseshoe (Stirrup).

Kevin Gallagher, Santos managing director and chief executive officer, set the start date for production from Pikka Phase 1 at early 2026; earlier than previous estimates, with Phase 1's 80,000 barrels a day expected to ramp up quickly and remain on plateau for 5-6 years.

Gallagher said Pikka Phase 1 is expected to be a game changer for Santos in that the company sees significant growth beyond the first phase: "Our focus is on making sure it works in Phase 1 before we advance to Phase 2. All the indications are looking very positive. The well logs look good; we just need some well test results in the next few months and hopefully that will give us all the assurance we need."

Gallagher said the internal rate of return, or IRR, for Pikka Phase 1 is currently estimated at 19% on a $60 oil price "and that will only get better," as Bruce Dingeman, top executive in Alaska, and his team continue to learn more and more with each well.

Gallagher also noted that the state of Alaska's regulatory environment was very stable and that Santos received strong support from state government, local governments and especially from indigenous communities.

"Even at the federal level there is strong support for the Pikka project," Gallagher said.

Cornerstone project

Pikka Phase 1 "is going to be the cornerstone project for the Alaska business," Ireland said.

"And from that cash flow we'll be able to refund the 40% return to shareholders, but we'll also be able to generate and pay for these future opportunities (Pikka Phase 2, Quokka Phase 1 and 2, and Horseshoe)," he said.

"These projects are staggered out in time. So one of the concepts we're utilizing here is to take the same team, the same designs and roll these over from one phase to the next and take those lessons learned at that macro level, apply them, and get further improvements such as cash flow for the subsequent investments," Ireland said.

Contracting advanced

Ireland said it was important to point out that "as far as contracts go $1 billion net in contracts -- that's out of $1.3 billion net in contracts necessary to get us to nameplate capacity -- are in place."

"Sixty percent of those contracts are EPF (engineer, procure, fabricate) type contracts that are locked in at great pricing due to the timing after coming out of Covid and to eliminate some of those inflation risks that are out there as well," Ireland said.

Other costs for Pikka Phase 1 "are also well established, such as drilling day rates and that sort of thing," he said.

"The pipeline order is in place," Ireland added.

"Important, too, in terms of project commitments is our commitment to net zero. We will be at net zero for our working interest share (51%) at start-up of Phase 1 and that's the commitment we'll continue to deliver on as we go through these additional phases," Ireland said.

This winter season

Both Gallagher and Ireland said Santos'operating company in Alaska, Oil Search (Alaska), is off to a good start on this winter's work.

"One of the next steps in construction is going to be this coming winter season. It's going to be pretty busy. ...We have all our plans in place," Ireland said.

"We've mobilized many people to the North Slope. We'll have over a thousand people working on the Slope this winter," he said.

According to paperwork filed by Oil Search (Alaska) with Alaska's Division of Oil and Gas, major construction this winter will include pipeline vertical support member, or VSM, installation along all pipeline routes, 44 miles of pipeline installation from ND-B pad east to the fuel gas tie-in near CPF 1, gravel mining and placement at the Seawater Treatment Plant, or STP, dock area at Oliktok Point, all facility pile installation, and the Nanushuk Operation Pad, or NOP, ND-B drill site, grind and Inject, and Nanushuk Processing Facility, or NPF, module installation.


Ireland said the company has "agreements in place with an Alaska Native landowner to secure nature-based offsets, as well as well as a consortium working on direct air capture that we hope to take some of the learnings, some of the technology, that is being tested by Santos in Australia."

Continuous learning and improving is a key part of the Santos culture.

"We want to make sure that as we go each step of the way we continue to see improvements in drilling performance and that will help leverage our long-term deliverability of these projects. We don't want to just hit target; we want to do better than target. We challenge ourselves to do that each and every day," Ireland said.

"We've addressed our drilling mud, our drilling practices and improving hole stability which is one of the challenges we ... have overcome. Also our targeting of the landing zone in the reservoir, we've adjusted that to give us better performance."

The Alaska business division also continues to optimize frack operations in order "to deliver better performance in that area. And that's where the rubber meets the road: what is the well rate going to be to deliver the reserves that we've premised. As I said, all indications from the geology and from the well performance to date gives us confidence that we're going to deliver," Ireland said.

Low-risk jurisdiction

Gallagher praised Alaska in his remarks to investors.

"We have a highly capable team in place, supportive stakeholders and partners, including our Indigenous communities. Alaska is a low-risk jurisdiction with world class environmental standards and values its resources sector," he said.

Energy security is a top priority for Santos: "We cannot turn off the taps on oil and gas before replacement technologies are technically feasible, affordable and available. Oil and gas will be required for many decades to come," Gallagher said.

Therefore, he said, a meaningful decarbonization strategy must include pathways to abate emissions from these fuels: "Our strategy includes a strong focus on abatement through large-scale carbon capture and storage, and technologies such as direct air capture," Gallagher said.

"While we seek to develop low-carbon fuels as customer demand and technology evolves, Santos is committed to supplying oil and gas, and abating our own and our customers'emissions through carbon capture and storage, energy efficiency projects, utilizing renewables in our operations and high-quality offsets," he said.

According to Santos: Pikka Phase 1 is the "right project at the right time in the right location."

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