Friday, November 28, 2014

‘Pace is everything;’ Caelus planning to spend $500M in 2015 on Slope exploration, development

Eric Lidji
For Petroleum News

With about eight months of Alaska operations under its belt, Caelus Natural Resources Alaska Inc. is expecting a year of expansion, Senior Vice President for Alaska Operations Pat Foley said at the Resource Development Council’s annual meeting on Nov. 18.

The Dallas-based independent is expanding the gravel island at its Oooguruk unit, starting preliminary work on the Nuna satellite to Oooguruk and conducting its first exploration work at acreage far from its existing properties. “One thing you’ll find about Caelus: We’re not going to let the grass grow under our feet,” Foley said. “Pace is everything. We’re not going to be careless, but we’re going to go as fast as we can.”

After months of negotiations and one major amendment to terms, Caelus closed on its acquisition of the Alaska assets of Pioneer Natural Resources Alaska Inc. in April 2014.

The deal may have initially looked like a bid for existing production, which was certainly sweetened when Caelus received the results of Pioneer’s final winter development season. “We had four wells that we’d fracked and we hadn’t yet brought online,” said Foley, who worked for Pioneer before moving over to Caelus, as most Pioneer employees did. “All four of those wells came on with initial production rates in excess of 5,000 barrels of oil per day. And, literally overnight, our production tripled. We went from less than 10,000 barrels per day to over 20,000 barrels per day, for a brief period of time.”

Current production is closer to 13,000 barrels per day, Foley said.

With nearly $1 billion in capital available to it through a recent partnership with Apollo Global Management, Caelus is undertaking a $500 million program this coming year.

In those activities, Caelus will be assuming a larger share of the bill than its predecessor, Pioneer Natural Resources. Even though Eni Petroleum retains its longstanding 30 percent interest in the Oooguruk unit, the minority stake only covers activities at the drilling island - not the onshore Nuna expansion project or the new exploration acreage.

Oooguruk expansion

The $500 million capital budget for the coming year is being split evenly between an expansion of the Oooguruk drilling island and construction of the Nuna facilities. With about 80 percent of its 48 drilling slots currently filled, the Oooguruk drilling island is “nearly drilled up,” as Foley put it. An expansion effort started by Pioneer and now being completed by Caelus would increase the six-acre island by some 30 percent and add 12 bays, which would allow the company to access resources currently out of reach.

The company has state and North Slope Borough permits in hand and is waiting for U.S. Army Corps of Engineers permits before it can start work on the expansion project.

Every well drilled from the gravel island to date has also been hydraulically fractured, making Caelus the “leading frack company on the slope right now,” according to Foley.

The company used 2.4 million pounds of sand proppant on its four development wells drilled this past winter and wants to expand use of the technology in the future to find the “optimal” amount of sand for operations. The program started with Pioneer, which brought Lower 48 “mechanical diversion” hydraulic fracturing technology to the North Slope.

Preliminary Nuna work

The Nuna project is an onshore development to access offshore resources south of Oooguruk Island and too far to reach from the island with existing drilling technologies. This winter, Caelus plans to lay gravel at the onshore site, in preparation for installing facilities and flow lines in early 2016 and starting production in the third quarter of 2016.

The first phase of development would involve 30 wells, split evenly between production and injection wells. Caelus would hydraulically fracture all wells, including injectors.

The Nuna development is targeting a 50 million to 100 million barrel pool in the Torok formation, a relatively shallow interval. “There’s a tremendous amount of oil in place,” Foley said. “And the question on Torok is: What is the recoverable portion going to be?”

That question hangs over the project, which Caelus has yet to formally sanction.

In July, Caelus told the state that it needed a reduction in royalty rates to make the project economic. The Alaska Department of Natural Resources agreed to take a 5 percent royalty on five leases (down from 12.5 and 16.667 percent) if the company sanctioned the Nuna project this year and met spending and development targets through early 2017.

The reduction is still going through public comments. Rep. Les Gara recently asked the state to leave the decision up to Governor-elect Bill Walker. The Legislative Budget & Audit Committee is scheduled to review the proposed royalty reduction on Dec. 2.

The third big source of spending this year is seismic.

Caelus is commissioning two 3-D seismic programs, including one targeting the mostly contiguous acreage the company grabbed during two recent state lease sales.

With $15 million in high bids, Caelus picked up some 322,795 acres across a broad region running from south of the Prudhoe Bay unit to south of the Point Thomson unit.

Caelus is currently keeping an eye out for partnerships, according to Foley.

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Sunday, November 9, 2014

Joint venture enables production at Mustang

By Tim Bradner
Alaska Journal of Commerce

Brooks Range Petroleum will begin drilling this winter on production wells for the new Mustang oil field on the North Slope. The first release of funding from investors, which includes the Alaska Industrial Development and Export Authority, was made Oct. 29 and will finance the drilling as well as development of an oil and gas processing facility and connecting pipelines.

Mustang is expected to produce about 9,000 barrels per day, or b/d, in 2016 with that increasing to about 12,000 b/d in 2017, Brooks Range Chief Operating Officer Bart Armfield has said. Production will be from the Southern Miluveach Unit west of the Kuparuk River field.

In a press release, Brooks Range said AIDEA, the state’s development corporation, and CES Oil Services, a subsidiary of Charisma Energy Services Ltd. of Singapore, will own the processing facility through Mustang Operations Center 1, LLC. Brooks Range Petroleum Corp. will be the Mustang field operator and will build and operate the facility, Armfield said.

The process plant and pipelines are expected to cost between $200 million and $225 million, he said. Total costs, including drilling, are expected to be $500 million.

“We are very pleased to take this important step and to move forward with the construction of the production facility for the Mustang field,” Armfield said.

AIDEA will invest $50 million in the processing plant in addition to $20 million AIDEA previously invested with partners in a Mustang access road and gravel pad, will will bring the state’s total investment to $70 million.

This is the first equity investment by AlDEA in upstream production infrastructure. The authority’s previous oil infrastructure investment, also done with partners, was in a jack-up rig to do Cook Inlet exploration drilling.

The Mustang plant will be the first independently-owned, open-access production facility on the North Slope.

“The Mustang facility will enable companies operating on the North Slope to economically develop additional fields in a highly prospective area that to date has remained relatively underexplored.” Armfield said in the statement.

This is significant because independent companies exploring on the North Slope have had difficulty negotiating access to process facilities in producing fields that are owned by BP, ConocoPhillips and ExxonMobil, major operators on the Slope. This limitation motivated AIDEA to help finance an independent open-access process plant, AIDEA officials have said.

The plant is being designed to handle 15,000 barrels per day, to leave capacity available for production that would come from new discoveries, separate from the Mustang field. Armfield has said that Brooks Range has nearby prospects it intends to test once Mustang is operating, and companies are exploring and making discoveries in the immediate area. Those include Repsol, which plans to drill three evaluation wells this winter to evaluate discoveries the company made two years ago.

Previously AIDEA, the state authority, has mainly financed infrastructure like access roads for mining projects and ports, although it is also now investing in a small liquefied natural gas plant at Prudhoe Bay that will ship LNG by truck to Fairbanks, in Interior Alaska.

Armfield said production from the Mustang field would not have been possible without the project financing provided by the AIDEA-CES partnership.

“Because of AIDEA, BRPC was able to secure hundreds of millions in private investment to pursue additional development drilling at Mustang.” Armfield said.

This project will boost the state’s economy, create hundreds of new jobs, and generate significant revenue for the state.

“More drilling means more jobs, more production, and more revenue for the State of Alaska,” Armfield said. “This project will generate 50 jobs related to design and engineering, environmental permitting and services; 250 construction jobs; 20 to 25 full-time operations positions and up to 200 indirect long-term jobs.

“AIDEA’s overall $70 million investment is estimated to leverage more than $500 million of private investment in Mustang Field development. We are entering an exciting new era on the North Slope. With this project, Alaska is beginning to see the fruits of Senate Bill 21 (the state’s 2013 oil tax reform legislation) which, when combined with AIDEA’s willingness to work with independent oil and gas companies, will unleash the vast potential that remains untapped on the North Slope.”

Although exploration and development planning had been underway for Mustang prior to the Legislature’s passage of SB 21 the enactment of the tax changes created a more favorable long-term economic environment for production, which helped Brooks Range secure the final package of investment for the field development.

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Buccaneer assets sold; claims state owes $20M in credits

By Elwood Brehmer
Alaska Journal of Commerce

Bankrupt Buccaneer Energy Ltd. is demanding more than $20 million from the State of Alaska, days after appearing to sell its remaining assets.

The Australia-based independent filed a motion Oct. 30 in U.S. Bankruptcy Court for the Southern District of Texas to compel the state to pay tax credits it claims it is owed under the Alaska’s Clear and Equitable Share, or ACES, oil and gas tax system.

Buccaneer’s domestic subsidiary, Buccaneer Resources LLC is based in Houston.

On Oct. 27 AIX Energy LLC, an energy-finance company that in April purchased much of Buccaneer’s debt, won an auction for Buccaneer’s assets with a $44 million bid.

Miller Energy Resources Inc., which owns Cook Inlet Energy, was the only other participant with a $35 million bid.

The sale agreement is tentative pending final approval.

Buccaneer filed for Chapter 11 bankruptcy May 31 after Cook Inlet gas exploration came up empty and financing deals fell through.

Its claim that it is owed more than $20 million in ACES tax credits came about 40 days after the company paid $380,000 to the state and the Kenai Peninsula Borough in property taxes and associated fees related to the small Kenai Loop gas field, according to the filing.

The gas field in the City of Kenai is Buccaneer’s only producing asset.

The state has paid $37.9 million in ACES credits to Buccaneer to date, according to the company.

Prior tax credit payments were made between two and six days after approval notifications were received from the state, Buccaneer claims, and the notifications for the three applications in question were dated Oct. 8, more than three weeks before the motion requesting the court order the state to pay was filed.

“The state’s current treatment deviates significantly from historical practice,” Buccaneer’s attorneys wrote.

Department of Revenue spokeswoman Lacy Wilcox said agency officials could not comment on the issue because it is pending litigation.

A hearing on the outstanding tax credits is scheduled for Nov. 12 in the Houston court.

Southcentral Alaska Native regional corporation Cook Inlet Region Inc. has objected to the auction and sale proceedings multiple times, claiming the expedited timing has not given affected parties enough time to review critical documents. The latest such objection was filed Nov. 4 regarding a proposed hearing about Buccaneer’s bankruptcy plan.

CIRI owns land adjacent to the Kenai Loop pad and is involved with Buccaneer and the State of Alaska in an ongoing Alaska Oil and Gas Conservation Commission hearing over how much it is owed for gas Buccaneer produced from the Kenai Loop field.

Buccaneer has acknowledged in the hearing that it produced gas attributable to CIRI.

“It’s a question of how much. There’s no question that we’re due production from that field. I don’t want to beat around the bush on that,” CIRI Vice President Ethan Schutt said.

The funds in an escrow account that Buccaneer has been feeding with its production revenue should be enough to cover royalty payments to both the state and CIRI, according to Schutt.

Buccaneer was ordered to set up the account by the AOGCC as a way to segregate funds it may need to disburse later. According to a Nov. 3 court filing, about $8 million had been transferred to the account as of Oct. 31, and Buccaneer had $10.9 million in unrestricted cash, nearly all of which came from an ACES credit payment.

When the company filed for bankruptcy it claimed to have assets of less than $500,000 and liabilities between $50 million and $100 million.

To the degree that CIRI is asking for more than royalty payments “it gets a little dicier” as to where that money would come from, Schutt said.

Buccaneer also owes the Alaska Department of Natural Resources more than $605,000 for lease and royalty payments. The state was listed as the company’s ninth-largest unsecured creditor for the amount in a June court filing.

Schutt said that CIRI has had several conversations with AIX representatives presuming it takes over Buccaneer’s assets, which also includes standing in a state Superior Court case that largely parallel’s the AOGCC docket.

“We have some terms to work out with (AIX) one way or another,” he said. Elwood Brehmer can be reached at