Pursuing a project in Alaska brings about its own unique problems. Operationally, due to the harsh weather conditions, your active time can be cut down to just sections of the year, very low temperatures can pose problems when drilling holes and this is before you consider any of the technical issues that can arise. 88 Energy (LSE:88E) (ASX:88E) are in the enviable positioning of having de-risked their Alaskan conventional and unconventional oil play Icewine and are carrying out the final stages of a technical exploration programme promising huge prizes.
88 Energy’s journey began around November 2014 when CEO David Wall was introduced to Paul Basinski, CEO & president of Burgundy Xploration – 88’s joint venture partner at Icewine. Basinski had been an integral part of ConocoPhillips’ Eagle Ford project, the largest onshore discovery in North America and Conoco’s biggest in its history. Wall admits that Basinksi has played an equally important role in progressing the Icewine project based on the experience he picked up with Conoco.
“We are trying to emulate Conoco’s successful early entry into the Eagle Ford by employing a similar approach to exploration and appraisal at Project Icewine in Alaska. We have passed the first hurdle with our maiden exploration well, Icewine1, which showed that we are where we want to be in regards to thermal maturity and that the target reservoir, the HRZ interval, has exceptional porosity and permeability compared to other successful shale plays.”
Project Icewine comprises both conventional and unconventional oil prospects on Alaska’s North Slope. 88 Energy holds 272,000 gross acres (210,000 net acres) at the project and is sitting on a deposit with the potential to produce billions of barrels of oil equivalent. It is a unique position for a Perth-based junior to be in and now the focus is developing the project into a commercially viable proposition.
Wall says Basinski identified the potential for a ‘vapour phase’ in Alaska. A situation where you have reservoir liquids with lower viscosity than normal and so they behave like a gas and can flow at higher rates. However, when you get them to the surface, because of the pressure differential, they are 70%+ liquids which are more attractive economically.
The project took off in 2014 when 88 Energy and Burgundy leased 90,000 acres at Icewine. Having originally planned to go forward with a 3D seismic study, Wall and Basinski changed tack to mirror Conoco’s approach in the Eagle Ford.
“We decided to drill a core hole first, to ensure that the metrics and parameters you need to have for this vapour phase existed. Because if we weren’t in the right thermal maturity window and didn’t have the over pressure and permeability, the play wouldn’t work.”
Basinski dubbed those factors that could kill the opportunity as Icewine’s ‘Achilles Heel’ and having de-risked the project of any terminal issues the joint venture can now plough ahead with further technical work.
“Just because the things that we require for this vapour play exist, doesn’t mean the play is going to work. There are a whole set of other things we need to figure out like the rock mechanics and whether we can frack and flow it effectively.”
The Alaskan opportunity is in a very strong position in terms of its above ground and below ground elements. The below ground has been de-risked as much as possible through the drilling of Icewine 1 and the mitigation of its Achilles Heel. The above ground story has several key attributes – predominantly all the necessary infrastructure already exists. The project is located on the Dalton Highway which is the only year-round operational access road meaning 88 can drill all year round from locations adjacent to the road.
Wall says that is a key advantage in terms of being able to get the product to market. This will be crucial if the company enters the development stage where getting the hydrocarbons to market quickly is key to the economics. The other fundamental infrastructure available is the Trans-Alaska Pipeline System that runs through the project area.
“That has about a 1.5 million barrel per day spare capacity and there is a strong incentive for the State to increase the flow rate through the pipe. Not only because more oil through the pipe is more revenue in royalties and taxes but because if the flow rate gets below a certain amount which it was designed for it will begin to experience issues and may result in a shut-in in the next 5-10 years.”
The Alaskan State Government had what Wall called ‘generous incentive schemes’ to attract projects. The policy was that 85% of exploration drilling costs qualified for a rebate in cash, 88 Energy took advantage of that with the drilling of Icewine 1 but it has since dropped down to 35% of costs. Further to that it is important to consider the sheer size of the acreage 88 Energy hold. Having initially acquired around 100,000 acres following the Burgundy joint venture, Wall and Basinski decided to up the acreage and up the position by another 172,000 based on an opportunity created by the downturn in industry environment at the time.
“While we were drilling the first well we sat down and thought about the strategy, if the results were successful, then the surrounding acres would be worth a lot more than what we would be able to get them for after the fact.
“We put the deposit down and successfully bid on the additional acres. Recently, we paid the balance for those acres because of a belief that the project has a good chance of being successful. We’ve got 272,000 acres now which is a pretty decent chunk for a couple of small companies.”
Until recently Alaska was the only state in the US from which oil could be exported. That has since changed but it is still well located in terms of exporting the product to market. California is a key exportation market as it is disconnected from America’s East Coast oil. However, Alaska is close to the South East Asia market so it has a ‘distinct advantage’ there too.
“It is a very good location in terms of export capability, also for us being right on top of the pipeline (it) gives us an advantage in terms of getting the product to market quickly.”
The successful drilling at Icewine 1 has proved to be a turning point in the exploration phase for 88 Energy. It proved that the key risks that could kill the project had been mitigated. Wall says, for example, identifying Icewine had the correct thermal maturity was fundamental to the project’s success. If it is too mature the oil viscosity is too high to flow at a commercial rate, if it is too low and there is too much gas there is no way of commercialising gas from Alaska’s North Slope at the moment. The 88 Energy boss says you need a ‘Goldilocks’ situation which Icewine has.
“We were able to definitively show that the thermal maturity for that is correct and we are in the right window for that to occur.
“If we didn’t have that, the whole unconventional play would be dead. And if we were going to fail, we wanted to fail as fast as possible because otherwise you are just wasting time and money.”
Going forward, Wall describes the drilling of the next well, Icewine 2 – the production test well – as crucial to the project’s success. With the subsurface project de-risked Wall is now putting the company’s chance of success at Icewine 2 at 50% and he says with a potential prize of several billion barrels of oil it is a very good opportunity.
“Typically, when you are looking at those types of prizes you are in deep, offshore areas, which are extremely expensive – each well costing in the order of US$100 million – and your chances of success, even with 3D seismic, are 25% at best.”
So, with Icewine being onshore and available to test at a fraction of the price – with a well costing less than $20 million – it is obvious why Wall sees cheap access to billions of barrels of oil at Icewine as an attractive proposition.
Wall says he can’t be any more confident than a 50% chance of success without drilling the second well. Firstly, that is down to known risks, such as the variation of rock type and having to tailor the drilling programme to suit what they have underground. Secondly, there are unknown risks, which could spring up once they are into the next well and by their nature cannot be planned for.
Another risk which 88 will face in the ensuing year is around funding. At a cost of less than $20 million or thereabouts Icewine 2 is fully funded, with 88 and Burgundy putting up their respective share of the costs (78% 88 / 22% Burgundy). Expenditure over and above the cost of Icewine 2 will require additional funding.
Wall is assessing several options to mitigate the funding risk, “One is to farm out and we are in discussions with more than one party. We have also been offered money by more strategic investor types – large energy specialist funds.
“We’ve already raised a lot and diluted [from share placements] and now is the time to minimise dilution and maximise value for shareholders because we are on the cusp of that very large value creation event.”
To progress the project 88 Energy acquired 2D seismic surveys earlier in the year which will provide insight into the conventional potential at Icewine as well as de-risking any horizontal drilling in the area.
“We have two rounds of seismic that will be processed and interpreted, then potentially a farm out or a funding deal before the end of the year or early next year as well as progression in terms of finalising permitting for Icewine 2, locking in major contracts for the service providers and then we will be into the drilling probably by March 2017,” says Wall.
Based on the success of that well, Wall is hoping to have a whole new set of challenges as Icewine rolls towards commercial production.
“If that well is successful we will have a different problem, one that it much more pleasant and it will be the next stage of development. Initially it will be a number of wells on or near the road to take advantage of the year-round drilling potential and to get production kick-started for the first phase of a development project.”