More oil to TAPS Development of huge North Slope Alaska oil discovery moving forward KAY CASHMAN Petroleum News When Bill Armstrongs company took over operatorship of the 750,000 acres it owns jointly with Repsol on the North Slope, many Alaskans saw it as another casualty of low oil prices. The October announcement cancelled three of this winters wells in the fifth and last year of the partners aggressive $1 billion-plus exploration program, triggering fear the Spanish major, which had promised to make a field development decision in January, was pulling out of the state, and thus delaying development by years. Instead, Bill Armstrong told Petroleum News Feb. 12, the new operator, Denver-based Armstrong Oil & Gas, and its now minority partner, Repsol E&P USA, are preparing to accelerate development of their Pikka unit and what is possibly a multibillion barrel resource in just two of at least six horizons, making it a contender in size with the North Slope legacy fields it lies between - the ConocoPhillips operated Alpine and Kuparuk fields. In October, then-Alaska Department of Natural Resources Commissioner Mark Myers referred to the discovery as amazing. In a Feb. 14 email to Petroleum News Myers said, 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, with one caveat: The discovery is multiple different reservoirs, not just one major reservoir as in the case of the original Kuparuk and Alpine discoveries. Myers, who resigned as commissioner Feb. 16, is very excited to see Pikka development moving forward. Peak output 120,000-plus barrels per day At its peak, daily oil production rates within the Pikka unit is expected to be 120,000 barrels of oil per day, Armstrongs top executive and founder Bill Armstrong told Petroleum News in a recent interview. Whereas Myers couldnt verify the total daily production potential from information that has been publicly released, which is all he felt comfortable commenting on, he did say in an email to Petroleum News, assuming that these numbers - reported by Petroleum News Oct 18 - are accurate, a production rate of 120,000 bop/d is not unreasonable under the probable contingent reserves reported, with a peak production rate as high as 250,000 bop/d under the possible contingent reserve. According to the Alaska Department of Revenue, the state currently produces about 515,000 bop/d, almost all of which comes from the North Slope. Although Armstrong officials said they have shown Myers its well logs and geophysical data, the well and seismic information remain confidential, Myers said, so I can only comment based upon what Armstrong and Repsol have made public following delineation drilling in the Pikka unit last winter. They have reported a very significant oil discovery in the Jurassic Alpine sandstone which was encountered in four of their wells, he said. Additionally they have made a major oil discovery in the Cretaceous Nanushuk formation, which they have encountered in seven wells, Myers said. The Nanushuk pool has a 650-foot-plus oil column, good porosity and 150-foot thick net pay according to Myers. We have multiple other horizons that we plan to develop: at least six different zones. That said, our Nanushuk and Alpine are the biggest at this time, and those will be developed first, Bill Armstrong said. In total, Armstrong and Repsol have reported contingent oil reserves of proven 497 million barrels, probable contingent reserves of 1.4 billion barrels, and possible contingent reserves of 3.7 billion barrels, Myers said. Oil expected to flow in 2021 The state approved the 63,304-acre Pikka unit in June. Pikka, which sits between the Colville River unit (Alpine and satellites) to the west, the Oooguruk unit to the northeast and the Kuparuk River unit to the east, includes 33 state and joint state and Arctic Slope Regional Corp. leases (see map in pdf of this article). The Native surface ownership belongs to the Native village corporation in Nuiqsut, Kuukpik Corp., and the subsurface is shared by the state of Alaska and the regional Native corporation, Arctic Slope Regional Corp. Kuukpik is involved in oil and gas surface leasing in the area, and both it and ASRC, mainly through subsidiaries, are providers of oilfield support services. With construction slated to begin with the completion of the ongoing EIS, Pikka oil should start flowing in 2021, assuming no large delays, Bill Armstrong said. Several forecasts put crude above $50 a barrel at that time, which is what the Department of Revenue estimates it costs to produce oil on the North Slope. After 16 years in the state, starting with the discovery and subsequent development of the 225 million-barrel Oooguruk field in 2000, Bill Armstrong is still betting on Alaska. Nanushuk a new play for North Slope The Nanushuk is a new and different play for the North Slope, notable for even thicker pay than that discovered in the Alpine reservoir and at such a shallow depth (4,100 feet as compared to 6,500 feet), Bill Armstrong said. Thats what makes it so exciting. Nobody has seen this formation productive in this depositional environment before. You look at how thick it is, how good the oil is, how good the reservoir is - it all bodes really well for the play, he said. More than 15 years ago when Myers was working for ARCO Alaska as an exploration geologist in the area, we saw very good evidence for the Nanushuk oil that Armstrong and Repsol have identified and delineated. At that time we had no idea of the size of the accumulation and shortly later the company, predecessor to ConocoPhillips Alaska, exited the area. It is wonderful to see Armstrongs aggressive exploration approach and their huge success, Myers said. More North Slope discoveries out there The Armstrong-Repsol exploration program has drilled a total of 16 wells on less than 10 percent of the partners 750,000 North Slope acres. Very few people predicted, as Armstrong and Myers did, that reservoirs the size found at Pikka could still be discovered in Alaska. More importantly, Bill Armstrong noted, there are more fields out there to be found. But, he said, it is going to take a fiscal policy with incentives, such as the one currently in place, to find them. Excuse the grammar, but there is one irrefutable fact in oil exploration - every well not drilled doesnt find oil. Armstrong is not alone in his thinking. Before becoming part of the Walker administration, and while the head of the U.S. Geologic Survey and Alaskas Division of Oil and Gas, Myers repeatedly credited the discoveries Armstrong and other explorers made on the North Slope in recent years to the incentives offered by the state of Alaska. Doing business in Alaska risky Speaking of the states fiscal regime, the biggest threat to Pikka field development, Bill Armstrong told Petroleum News Feb. 12, would be a detrimental change in Alaskas fiscal policy - action some state officials are threatening in the face of shrinking state revenues because of low crude prices. Alaska finally has a fiscal policy that is working - promoting oil and gas exploration, development and production - but if state officials panic during this temporary price collapse and do something like raise taxes or do away with incentives, it could delay our project, maybe even permanently. And this is when the state needs the future revenues the most and when unemployed Alaskans need it the most, Bill Armstrong said. There are a few tweaks that could improve the states fiscal policy in terms of encouraging more oil production, he noted, but basically the current regime is working. Alaska cant seem to get out of its own way, he said, referring to an annual push in the state capitol by various factions to increase the burden on the states prime moneymaker, the oil industry. Once a fiscal regime is working for all parties, why keep threatening to change it? Armstrong asked. The price of oil has always been cyclical, he said. We all have to tighten our belts, but to panic in the short term by raising taxes and eliminating incentives is counterintuitive when the oil industry is currently debating dropping or delaying developments due to low prices. Other oil provinces lowering taxes, costs Other oil provinces around the world, such as Scotland for the North Sea, Mexico and Iran, are lowering, or looking at lowering, the burden on the oil and gas industry while prices are low. But Armstrong is not asking for lower taxes from the state of Alaska. If the state of Alaska does not change the rules in the middle of the game, Armstrong is willing to bet crude prices will eventually come back up, so starting field development makes sense to Bill Armstrong and his partners. We are starting all of our important EIS, pre-FEED (preliminary front end engineering and design) work, planning, etc. now. We cant and wont be able to start the actual development until we get the green light from the EIS and other approvals, he said. The company does plan to drill one extension/appraisal well in the Pikka unit next winter, however, at an estimated cost of $40 million, he said. Three gravel pads and roadblocks With record pay thicknesses and excellent reservoir parameters, Armstrong has modeled the Pikka units Nanushuk and Alpine wells to produce at high rates for a long time, and to have EURs (estimated ultimate recoveries) that should exceed 10 million barrels per well, Bill Armstrong said. Proposed development plans have not changed since Repsols initial filing for a U.S. Army Corps of Engineers permit on June 15 for what agency paperwork refers to as the Nanushuk project. The company expressed its willingness to submit to the Environmental Impact Statement process early on. We - Repsol and Armstrong - made the conscious decision to go with an EIS as opposed to just an EA as this was encouraged by the Native corporation ASRC, the DNR and others. We are willing to work with all parties, Bill Armstrong told Petroleum News after the Alaska Dispatch published a Feb. 15 article about the EIS. The project, which proposes to develop the Nanushuk and Alpine reservoirs in the Pikka unit, will be located near the east channel of the Colville River, with two of the three proposed gravel drill sites a half a mile away. The subsurface of the leasehold is perennially frozen at depths from 1,500-to-2,000 feet. There is already field development by ConocoPhillips at nearby Alpine (Colville River unit), which sits in the Colville River Delta and has five gravel pads, versus Repsol and Armstrongs proposed three pads. There is a long history of oil development in the North Slope between the Sagavanirktok River and the Colville River, the Corps said in its EIS determination. Therefore the proposed project would be similar to past, present and foreseeable developments and would not establish a precedent. Field construction includes 76 wells Armstrong and Repsols proposed field construction includes the following major components:  Seventy-six production and injection wells;  A 23-acre Nanushuk pad at Drill Site 1 contains a central processing facility, CPF1, to separate water and natural gas from oil and natural gas liquids;  Two additional standalone gravel pads on 35 total acres, at DS2 and DS3;  A 10-acre operations center pad;  A 0.6 acre tie-in pad at CPF2, connecting new infrastructure to existing Kuparuk facilities;  Access and infield gravel roads, 25 miles combined;  Bridge over the Miluveach River, 337-foot span, and the Kachemach River, 330-foot span;  Fourteen miles of infield pipelines on vertical support members;  The 21.5-mile Nanushuk pipeline on vertical support members;  A potable water intake system;  A screeding area in front of the existing Oliktok Dock;  A wastewater and water treatment plant;  Trenching for power and fiber optic cables at pipeline-road crossings. Sales quality oil will be transported through the new export pipeline to the Kuparuk oil sales pipeline, and then to the trans-Alaska oil pipeline. A secondary purpose of the Nanushuk project is to further delineate geologic features and hydrocarbon accumulations in Repsol and Armstrongs leasehold from the proposed infrastructure. In a recent AAPG Explorers article, David Houseknecht, senior research geologist and project chief for USGS Energy Resources Program in Alaska, said the Alpine field remains the largest onshore accumulation discovered in the last 30 years in the United States, and, it is almost certain to produce more than 1 billion barrels of oil during its lifetime. It appears Armstrong and Repsols Pikka unit will surpass Alpine and, as Myers said, has the potential to be second in size to Prudhoe Bay. Time will tell.

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