Monday, December 17, 2012

AIDEA funds Mustang road; With $20M loan, public corporation will help build early infrastructure

Eric Lidji
For Petroleum News

In a move described as a sign of things to come, the Alaska Industrial Development and Export Authority has agreed to loan $20 million to a small independent looking to build road and pad infrastructure to support a budding North Slope oil field development.

The $20 million purchases an 80 percent stake in Mustang Road LLC, a new company the public corporation will create with Brooks Range Petroleum Corp. The company will fund the initial infrastructure needed to bring the Mustang field into production by 2014.

The field is in the Brooks Range Petroleum-operated Southern Miluveach unit, located in the central North Slope, adjacent to the southwestern corner of the Kuparuk River unit.

By financing one small piece of a development project with the goal of improving the overall economics of the entire project, the Mustang Road deal “breaks new ground for the authority,” AIDEA board member Robert Sheldon said during a meeting Dec. 6.

Through Mustang Road, AIDEA and Brooks Range Petroleum plan to build five pieces of infrastructure in the coming year: a winter ice road, a gravel mine, a 19.3-acre gravel production pad, a 0.7-mile access road from the mine to the pad and a 4.4-mile open access road from the pad to the existing road system at the nearby Kuparuk River unit.

Under the deal, Brooks Range Petroleum is currently on the hook for the remaining $5 million needed to fund the project, expected to cost some $25 million, as well as “any additional cash calls required to complete the road and pad,” should the project exceed its budget. The Brooks Range Petroleum portion of the funding is guaranteed by its parent company Alaska Venture Capital Group and its partner Ramshorn Investments

Inc. Brooks Range Petroleum would operate and maintain the open access road.

The deal involves an 8 percent rate of return over 15 years, which would bring AIDEA around $5.44 million. AIDEA believes existing tax credits will constitute 46 percent of the total capital cost, totaling some $11.5 million and reducing AIDEA’s initial payments considerably. Mustang Road LLC will also become a 1 percent working interest owner in the Southern Miluveach unit, allowing AIDEA to collect royalties on future productions.

A mid-sized field

In addition to the potential to create jobs and increase North Slope oil production, AIDEA is interested in the Mustang project, in particular, because of its size and location.

While a Brooks Range Petroleum-commissioned study by DeGolyer & MacNaughton estimated the proved reserves of Mustang at 24.7 million barrels, an AIDEA-commissioned study by David Hite estimated 30.7 million barrels in proved reserves. (The Hite study, however, came in under the DeGolyer & MacNaughton study when it came to estimating the less likely “proved, probable and possible” reserves at Mustang.)

Additionally, the Mustang discovery wells are less than a mile from the Alpine Pipeline, making the project cheap by North Slope standards, from a transportation standpoint.

AIDEA rates ‘very competitive’

Asked by the AIDEA board why his company sought public financing, Brooks Range Petroleum Chief Operating Officer Bart Armfield said they tested the waters in the Lower 48 and found the interest rates offered by AIDEA to be “very competitive.” Additionally, Brooks Range Petroleum believes the Mustang project, if successful, could become a model, making it easier for smaller independents to get a toehold on the North Slope.

While AIDEA hopes to create a model it can replicate in the future, it also believes the Mustang road will improve the economics for other development projects in its vicinity.

In particular, AIDEA has already approached two nearby lessees, the Arctic Slope Regional Corp. subsidiary ASRC Exploration LLC and the Spanish major Repsol, about using the road as a staging area and said both companies seemed amenable to the idea.

AIDEA is also interested in financing the $178.6 million production facility Brooks Range Petroleum would eventually need to build to bring the prospect online.

In addition to the approval of its board, though, AIDEA would need authorization from the Alaska Legislature before it could participate in the larger financing project.

An emerging trend

In 2011, AIDEA took its first big leap into the oil and gas industry by helping Buccaneer Energy Ltd. purchase a jack-up drilling rig for exploring in shallow offshore regions.

Recently, Gov. Sean Parnell announced AIDEA would be the lead agency for issuing up to $275 million in loans to spur private construction of a North Slope liquefaction facility, a project designed to bring natural gas to the Interior and potential Southcentral.

Read more: http://www.petroleumnews.com/pntruncate/605396253.shtml