Despite delays, Brooks Range says Mustang will produce in ’17

  • Brooks Range Petroleum President Bart Armfield has told the state that the Mustang field on the North Slope will start production late this year. Through the Alaska Industrial Development and Export Authority, the state has invested $70 million in advancing the project. (Photo/Michael Dinneen/For the Journal)

The company developing a small North Slope oil field with the help of $70 million in funding from the State of Alaska says the project will finally come together this winter after years of delay.

Anchorage-based independent Brooks Range Petroleum Corp. plans to have oil flowing from its stalled Mustang project in December, according to the development plan the company submitted to the Division of Oil and Gas.

The Mustang prospect is in the Southern Miluveach Unit on the west edge of the large Kuparuk River field. Brooks Range expects it to produce up to 15,000 barrels of oil per day at its peak from about 22 million barrels of proven reserves.

In December 2012, the state-owned Alaska Industrial Development and Export Authority invested $20 million of the $27 million needed to build a five-mile road to Mustang and a 19-acre pad for production and processing facilities. The gravel road and pad — in which AIDEA is an 80 percent owner — were finished in April 2013.

At the time, Brooks Range leaders said they wanted to have the field in production by fall 2014 and credited incentives in the just-passed and industry-supported oil production tax structure under Senate Bill 21 for improving the economics of the project and spurring it forward.

In April 2014, AIDEA committed another $50 million equity investment in the $225 million Mustang oil processing facility. Brooks Range Chief Operating Officer Bart Armfield said at the time that the project would start production in late 2015 and likely peak in 2017.

To date, AIDEA has invested $49.8 million of the $50 million commitment in Mustang and spent another $670,000 on project management and other in-house expenses related to the project, according to the authority.

Full development of the field was estimated at about $580 million and included drilling 11 production and 20 more gas and water injection wells.

With AIDEA’s investment, the Mustang processing facility would be the first such open-access facility on the Slope and hopefully help in the development of other nearby fields. Historically, independent North Slope explorers have had difficulty negotiating access agreements with BP, ConocoPhillips and ExxonMobil, which own most of the processing capacity for basin’s producing fields.

AIDEA’s equity was also key to Brooks Range’s ability to secure loans to finance the remainder of the project, authority and company officials said when the deal was made.

By August of 2014, Brooks Range was changing hands. Houston-based Thyssen Petroleum LLC and two partners, JK Tech Holdings Ltd. of Singapore and MEP Alaska LLC, a New York-based firm, purchased the independent oil company.

Armfield then told the Journal production would start in early 2016 at about 8,000 barrels per day and grow from there with additional drilling.

Thyssen, JK Tech and MEP Alaska purchased Brooks Range from Alaska Venture Capital Partners and Ramshorn Investments.

However, almost as soon as Brooks Range was sold oil prices started to tumble to the current $45 per barrel range. August 2014 was the last month the average daily price of Alaska North Slope crude exceeded $100 per barrel.

That put a damper on Mustang.

Engineering of the processing facility and associated infrastructure started in January 2015 but was put on hold by the third quarter of the year as low oil prices hampered financing and project economics, according to the Mustang development plan Brooks Range submitted to Oil and Gas last September.

Armfield declined a request for an interview regarding the status of Mustang.

Now president of Brooks Range, he wrote in a December 2015 letter to then-Natural Resources Commissioner Mark Myers that the company had spend $145 million on facility engineering, reservoir evaluation, permitting, drilling and other expenses to move Mustang forward.

Brooks Range completed one injection well into the Kuparuk reservoir and started a second well, but drilling challenges prevented the completion of any production wells at the time, Armfield wrote.

In addition to the oil price problem, Gov. Bill Walker’s veto of $200 million out of $700 million in state oil and gas tax credit payments in June 2015 forced the Mustang development schedule to be pushed back “to deal with unfavorable economic factors,” according to Armfield.

According to the Mustang plan, facility modules will be arriving to the Slope in August and September for installation and start-up to lead to first oil by December.

In November 2016 then-acting Oil and Gas Director Jim Beckham wrote in a letter to Brooks Range approving a term extension of the Southern Miluveach Unit that “the division remains concerned that BPRC will be successful” in getting to first oil by the end of this year.

“Based on the materials BRPC provided, it appears possible for BPRC to meet this deadline,” Beckham wrote further. “But the schedule is extremely tight and leaves little room for deviation.”

The slow development of Mustang also caused AIDEA and Brooks Range to rework their financing deals for the project.

AIDEA’s $50 million was to be repaid with 10 percent annual interest within seven years after the start of oil production from Mustang, or by the end of 2022, according to memo from AIDEA staff to the board of directors when the investment was approved.

That repayment plan has since been pushed back to start in 2018, according to documents on the authority’s website.

AIDEA spokesman Karsten Rodvik wrote in response to questions that the authority made its investments understanding the project could be impacted by the price of oil.

“We are taking steps to restructure our investment to reflect current market conditions, and given these comprehensive efforts, we believe that Mustang should move forward,” Rodvik wrote in an email.

AIDEA executives declined direct interview requests.

Similarly, the unpaid balance of AIDEA’s $20 million share of the Mustang road and pad is to be paid starting next year.

In 2014 and 2015, the authority got $11.5 million back in state oil and gas tax credits transferred from Brooks Range for its $20 million.

If the project ultimately is unsuccessful, AIDEA’s stake in MOC1 LLC, the company set up for the processing and production facility investors, provides the authority multiple forms of collateral, such as the equipment that would be used in the facility, according to Rodvik.

“Additionally, MOC1 has real estate security interests in the Mustang oil and gas leases, and other North Slope oil and gas leases in which the owners of Brooks Range Petroleum Corp. have a working interest,” Rodvik wrote. “If Mustang were not to go into production and the other parties default on their payment obligations, MOC1 can foreclose on the lease positions to sell those to third parties.”

Getting Mustang to first oil in 2017 is important because the company needs to drill and test a viable production well and either be in production or be working towards it by Dec. 31, according to Beckham, which is when the unit is set to expire.

DNR officials referred questions about Mustang’s progress to Brooks Range.

The department terminated the nearby Tofkat Unit held by Brooks Range in 2016 after the company held the acreage for years without doing much with it. In the case of Tofkat, Brooks Range allegedly was unable to secure an access agreement with Kuukpik Corp., the Alaska Native village corporation that holds surface rights to the state leases.

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Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
06/28/2017 - 12:46pm

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