Tuesday, April 17, 2012

A Third Phase; Brooks Range Petroleum aiming for the era of the small independent

Eric Lidji
For Petroleum News

With its announcement of a 40 million barrel discovery at its Mustang prospect, Brooks Range Petroleum Corp. is entering development mode after 13 years of exploration.

It could also be entering the third phase of the history of North Slope development.

After decades where only a few majors could afford to operate on the North Slope, the past decade saw the arrival of larger independents and new overseas entrants. With a commercial operation at Mustang, Brooks Range Petroleum could help usher in an era where many smaller independent producers could set up shop on the North Slope, too.

It would follow in the footsteps of Savant Alaska, the company now in charge of the Badami unit on the eastern North Slope, and Armstrong Oil & Gas, the pioneering independent that brought numerous big players to Alaska and is now working alongside fellow independent GMT Exploration Co and Spanish major Repsol E&P USA to explore a large swath of acreage extending across much of the central North Slope.

For the third phase to work, though, Brooks Range Petroleum believes the state needs to give smaller companies incentives to work together, to essentially mimic the abilities of those major companies, like many smaller fish swimming together to appear larger.

Long-held dream

If the third phase takes hold, it would fulfill a long-held dream among oil patch entrepreneurs, including John Jay “Bo” Darrah Jr. and Barton Armfield. They founded the Alaska Venture Capital Group in 1999 after watching majors pass over smaller North Slope fields that would be “company makers” in almost any other part of the country.

The company spent the next five years buildings up a portfolio of potential leads across the North Slope and creating a joint venture of independents to fund an exploration campaign. In 2006, it created Brooks Range Petroleum to operate activities on behalf of the joint venture. Today, Alaska Venture Capital Group owns leases, manages strategy and negotiates deals, while Brooks Range Petroleum provides technical and administrative services and handles operational expenses on behalf of the joint venture.

Currently, the joint venture includes Alaska Venture Capital Group and Nabors affiliate Ramshorn Investments, but previous incarnations also included the Calgary independents TG World Energy Inc. and Bow Valley Energy Ltd. (The British independent Dana Petroleum eventually bought Bow Valley and ultimately chose to sell its Alaska assets back to the joint venture to focus on the North Sea and Africa.)

Seven holes in five winters

Once getting its acreage, partners and financing together, the joint venture led by Brooks Range Petroleum quickly became one of the most active explorers on the North Slope.

In 2007, the group focused on the Gwydyr Bay region north of the Prudhoe Bay unit, an area long known to contain numerous smaller fields by North Slope standards. It acquired 130 square miles of 3-D seismic in the area and drilled the North Shore No. 1 and Sak River No. 1 wells. While Sak River No. 1 proved to be a dry hole, North Shore No. 1 found 70 feet of oil-charged Ivishak sandstone and flowed at 2,092 barrels per day of oil.

In 2008, the group focused on its leases near Nuiqsut. It shot 220 square miles of 3-D seismic around is Tofkat and Big Island prospects and drilled the Tofkat No. 1 well and two sidetracks, ultimately announcing a discovery in the Kuparuk sands in the region.

The following year, Brooks Range Petroleum formed the Beechey Point unit over its leases in Gwydyr Bay, including the Pete’s Wicked discovery it acquired in 2008.

In 2010, the group returned to Gwydyr Bay, drilling the Sak River No. 1A sidetrack and the North Shore no. 3 delineation well, but did not release results from either well.

That year, the group also acquired the North Tarn leases that became Mustang.

In 2011, the group drilled the North Tarn No. 1 well to test the Brookian and Kuparuk formations in the area southwest of the Kuparuk River unit. This year, the group returned to drill the Mustang No. 1 delineation well that confirmed the prospect. The Alaska Department of Natural Resources approved the Southern Miluveach unit at the prospect.

Meanwhile, the group also began studying development of its East Bank prospect within the Beechey Point unit and began inventorying other prospects at Southern Miluveach.

In the coming year, Brooks Range Petroleum could theoretically conduct as much exploration and development work as is has in its entire history until now. The company is slated to drill exploration wells in all five of its existing units in addition to a proposed well in a sixth unit yet to be approved by the state. While that’s going on, the company also plans to begin preliminary engineering for its development at Mustang.

Eyeing source rock potential

As a smaller player, Alaska Venture Capital is open to innovative development ideas.

Under the advice of Tudor, Pickering and Holt Co., the company is pursuing two potential development strategies. The first involves finding an investor that would fund initial costs until Mustang comes online, and later going public to raise capital. The second involves finding a producer willing to take a majority stake in the project.

Among the eight companies that have shown an interest in partnering with Alaska Venture Capital Group, one unnamed player is particularly interested in the potential for unconventional source rock plays. Alaska Venture Capital Group believes the western 100,000 acres of the joint venture’s more than 230,000-acre leasehold in Alaska are in the thermally mature area for the Shublik formation, and possibly the Kingak and Hue/GRZ, AVCG Managing Director Ken Thompson recently told Petroleum News.

The joint venture began discussing the source rock potential of its acreage at its companies meeting as early as the summer of 2010, according to Thompson. “We feel our JV’s almost 100,000 acres to the west around Tofkat, Big Island and even our Southern Miluveach unit area has source rock potential being in the right maturation and depth window. And we are also studying source rock and low-permeability sands potential in our Beechey Point unit,” Thompson told Petroleum News in March 2011.

The Shublik is more than 200 feet thick is areas of the western acreage, compared to 75 to 100 feet thick in other areas of the North Slope, according to Brooks Range Petroleum Vice President of Exploration Larry Vendl. The shallower depth of the Shublik in western area, around 13,000 feet, also makes it more likely to be in the oil window, Vendl said.

Sinclair’s Colville No. 1 well, just north the Mustang area, tested an interval around 7,900 feet deep in the Shublik source rock and recovered 510 feet of oil over two hours, Vendl noted. “While that oil volume was not exciting when oil prices were $10-20 per barrel, that volume is worthy of further assessment at today’s $100 per barrel,” he said.

Brooks Range Petroleum is currently conducting the standard assessments of the source rocks in its acreage to gauge performance, such as strength, brittleness, total organic carbon content, kerogen types, thicknesses, thermal maturity, and lithology variability.

Although bringing Mustang online by the first quarter of 2012 is the near-term priority for the company, Brooks Range Petroleum “is planning source rock horizontal well tests in 2014, but may elect to place a source rock horizontal well tail on a Kuparuk development well in 2013 as a lower-cost way to assess the source rock characteristics and flow capacity underlying the Southern Miluveach Unit,” Armfield told Petroleum News. The company is also considering added a horizontal tail on exploration wells in the Tofkat or Putu unit just to the west of Southern Miluveach to assess Shublik potential of its acreage closer to the National Petroleum Reserve-Alaska, Armfield added.

Noting the “excellent work” of Alaska shale frontrunners Great Bear Petroleum, Royale Energy and Halliburton, as well as ongoing efforts in the Lower 48, Alaska Venture Capital Group and Ramshorn “plan to be ‘fast followers’ versus being the source rock leader at this point in time,” Thompson said, “with the Mustang and other near-term developments taking priority to generate positive cash flow from oil production in early 2014, positioning for broader scale source rock assessment and development as well as continuing conventional geologic trap exploration and development.”

‘Field of Dreams’

As Brooks Range Petroleum approaches development, it is espousing the Field of Dreams philosophy for boosting North Slope activity: “If you build it, they will come.”

Specifically, that refers to infrastructure projects that improve smaller fields.

When the company applied to form the Southern Miluveach unit, it said Mustang could underpin development in the region by improving the economics of several marginal accumulations. “The other potential hydrocarbon accumulations are currently believed to be marginally economic and would not be developed without existing infrastructure and a processing facility within (the unit),” the company wrote. “Likewise, future development of the other potential hydrocarbon accumulation within (the unit) using the Mustang processing infrastructure will extend the economic life of Mustang production.”

When Alaska Venture Capital Group began, its principals anticipated improved access on account of terms in the Charter for the Development of the North Slope that encouraged the majors to open their facilities to independent producers. Because the charter did not dictate terms, though, negotiations under those terms have often been drawn out.

While Pioneer Natural Resources Inc. chose to enter into a facility sharing agreement with ConocoPhillips at the Kuparuk River unit when it brought the Oooguruk unit into production in mid-2008, its partner Eni Petroleum elected to build independent production facilities when it brought the nearby Nikaitchuq unit online in early 2011.

Brooks Range Petroleum plans to build a standalone modular production facility at Mustang, but the company believes it can improve the economics of smaller fields by building wisely and it believes the state can help the process along through tax breaks.

In a presentation to Commonwealth North in January 2011, Thompson said Alaska Venture Capital Group and other companies had identified numerous leads on the North Slope for potential fields in the range of 25 million barrels of less. He called these smaller accumulations a “new frontier,” on par with heavy oil and unconventional oil fields.

To promote development, he suggested a tax holiday on regional processing facilities until a sponsor recovers its costs. The developer, in turn, would agree to a published tariff with a 12 to 15 percent investor’s rate of return on facility capital and operating costs.

The facility would be open to all producers as long as capacity existed, and could accommodate additional producers in the future through expansions or back out clauses.

The optional credit would allow developers to take the tax break in return for set terms.

Cooperation is especially important for source-rock development, Thompson said. “If the source rock potential on the North Slope is to be truly unlocked to its maximum, multi-billion barrel potential, all in industry will need to work together and in unison with the state of Alaska. In particular, one of the biggest challenges facing potential development of thousands of source rock producing wells is the transportation logistics,” he said.

Because source rock development requires more drilling than conventional exploration, Thompson favors multi-well pads spaced about three miles apart and connected by relatively short gravel roads, similar to a scheme outlined by state engineers.

That’s where the Field of Dreams philosophy comes into play, he said.

Because of the logistics of moving rigs, equipment and supplies to that grid of remote pads, Thompson said that planning and possibly building environmentally friendly roads in advance of development “could be the single most important step to move the momentum of source rock development from this and next year’s ‘proof of concept’ to the following years’ full-scale, rapid development in the source rock fairway.”

The Thompson Plan

Additionally, Thompson proposed six other ideas for improving North Slope access.

Those include big issues such as reducing, eliminating or bracketing the progressivity rate on production taxes to give operators more of the upside during high oil prices, and fiscal certainty for future natural gas production to allow producers to reclaim costs.

It also includes two issues unique to independents. The first is extending the Smaller Producer Tax Credit to 2021. The credit pays up to $12 million per year to companies that produce less than 50,000 barrels of oil equivalent per day (and an increasingly smaller credit for companies that produce up to 100,000 barrels of oil equivalent per day), but is set to expire in 2016. The second is allowing exploration companies to be fully reimbursed for tax credits collected before production begins, rather than at 50 percent.

Thompson also supported Gov. Sean Parnell’s proposal for a 30 percent credit for well work to encourage infield development at legacy fields, and proposed a three-year tax holiday for viscous oil production brought online by 2016 and a five-year tax holiday for unconventional shale and low permeability developments brought online by 2021.

The BRPC management team

Today, Alaska Venture Capital Group is led by Managing Director and former ARCO executive Ken Thompson and Executive Managing Member Edger Dunne.

Brooks Range Petroleum is lead by Darrah, its president and chief executive officer, and by Armfield, its chief operating officer. The management team also includes:

• Vice President of Exploration Larry Vendl, who worked on the delineation and development of Prudhoe Bay in the 1980s and helped BP develop the Milne Point unit;

• Chief Geophysicist Larry Smith, who came to Alaska in 1997 as part of the team Union Oil Co. of California assembled to reinvigorate its exploration in the Cook Inlet basin;

• Senior Geoscience Advisor Doug Hastings, who played a role in the discovery of the Alpine and Tarn fields for ARCO Alaska during his 25 years on the North Slope;

• Engineering and Development Manager Mark Wiggin, a 30-year veteran of the Slope;

• Controller Tom Habermann, who managed development projects in Ukraine before working for the Arctic Builders Source and Mikunda Cottrell Accounting & Consulting;

• Drilling Manager Dan Shearer, another 30-year veteran of the Alaska oil and gas industry who helped bring the Alpine field online during his time with M-I Swaco.

• Special Projects Manager Laurette Rose, who splits time between the North Slope during the winter months and Anchorage for the remainder of the year for the company.