Caelus aims to unlock vast Torok oil resource

Photo/Michael Dinneen/For the Journal

Exploring for oil is never a business for the faint-hearted, particularly when oil prices are at $50 per barrel combined with the risk of ever changing tax policies. It takes a stout heart and plenty of nerve.

Jim Musselman and his team aren’t new, by any means, to exploration and development, and they’re making moves in Alaska.

Caelus Energy, a Dallas-based small independent where Musselman is CEO, has big plans on the North Slope, and Musselman has a big track record. He led the discovery and development of the giant Jubilee field offshore of Ghana when he headed Kosmos Energy, and he believes big discoveries, similar to Jubilee, can still be made on the Slope.

“My exploration people — and they’ve been with me for 20 years — say the North Slope is the ‘oilest’ place on Earth,” Musselman said.

That’s due to the Slope’s geologic history that has made it a prolific hydrocarbon-bearing region.

“It’s surprising how many opportunities are here with this much acreage available without a lot of work having been done, and also very close to Prudhoe,” and its infrastructure, Musselman said.

Caelus came to the North Slope in spring 2014 when it purchased Pioneer Natural Resources’ Oooguruk field and its leases, which also held the undeveloped Nuna discovery. Caelus has remained on an aggressive track since then.

In the fall 2014 state “areawide” North Slope lease sale, the company bid on and acquired 323,000 acres in an area southeast of Prudhoe, toward Point Thomson. There had been little work done in this area in recent years. Caelus commissioned new seismic work after acquiring the leases and launched a large winter program.

A few months later, in early 2015, Caelus acquired a 75 percent working interest in Smith Bay state offshore oil and gas leases that were formerly 100 percent owned by NordAq Energy, a small Anchorage-based independent.

Musselman believes this could be the crown jewel of Caelus’ Alaska holdings.

“We’ve been studying this prospect for two years. We believe it is similar to Jubilee, but with tighter rock that will require fracturing. The areal extent is massive, though. It could be a billion-barrel field,” said Caelus Senior Vice President of Business Development Matt Musselman, who is Jim’s son.

As a part of the NordAq deal, Caelus also obtained an option on federal onshore National Petroleum Reserve-Alaska leases to the south of Smith Bay that were explored several years ago by FEX Alaska, the U.S. exploration subsidiary of Talisman Energy. FEX drilled several wells and found oil and gas but the company shifted its focus away from Alaska and the finds were never delineated.

Unlocking difficult oil

Caelus had a banner season last winter at Oooguruk and on the planned Nuna project. Last year the company carried out one of the North Slope’s largest winter exploration and development programs just as oil prices were hitting the skids.

As many as 800 people were at work on Caelus’ two seismic programs (one in the newly-acquired eastern Slope lease and near Oooguruk and Nuna), as well as installing the gravel pad and road at the company’s new $1.2 billion Nuna project.

On top of all that, the company executed on its annual Oooguruk fracturing program, which required another couple of hundred workers. Caelus has become a leader on the Slope in the employment of leading edge hydraulic fracture technology and its use to produce prolific wells.

The “frac” stimulations on wells at Oooguruk involve large, multi-stage fracturing jobs similar to those done in shale oil production in the Lower 48 but at a smaller scale. This is part art and part science, and the drilling and completions team at Caelus seem to have found a “sweet spot” for cracking the hard-to-produce reservoirs of the Torok and Nuiqsut formations through large-scale fracturing and other new techniques.

This year the Oooguruk Island hit a record production of 23,531 barrels of oil per day.

Due to space constraints at Oooguruk the “fracs” are done in winter, Jim Musselman said, with four or five jobs done at a time in “batches” on finished wells. That’s necessary because there is no room in summer for the needed equipment on Oooguruk’s gravel production island.

In winter, equipment can be parked on frozen sea ice next to the island, so there is enough room. At Nuna, fracturing will also be done but it can be done year round, making the process much more efficient, Musselman said.

“The drilling and completion lessons learned at Oooguruk have been extremely valuable,” said Musselman.

The company hopes to apply them on new exploration and developments across the Slope.

Oil price impacts and oil tax credit vetoes

Caelus has not been shy in the past in its support of the oil tax reform law, Senate Bill 21, approved by the Legislature in 2013 and upheld by voters in August 2014.

“We’re the poster child of SB 21,” Musselman said, having brought Caelus to Alaska shortly after the passage of the law.

However, “We weren’t particularly pleased with the (Gov. Bill Walker’s) decision to veto the $200 million in tax credits, as it caused a negative ripple across the financial lending circuit that has set a lot of companies back,” he said. “Moreover, with the administration considering significant changes to the tax law (on the credit program) there’s a lot of investment capital waiting on the sidelines to see what happens.“

That uncertainty, combined with the decline in oil prices, has caused Caelus to bear down sharply on the pace of development and costs, both at Nuna and Oooguruk, Musselman said.

“Since last January we’ve been relooking at everything we do, scrubbing things down and sharpening our pencils. Because of this we’ve been able to shave a great deal off the facility costs for Nuna,” he said.

Despite those uncertainties, Caelus is preparing for another extremely busy winter season with a focus on its mainstay works at Oooguruk and the Nuna project but now adding a large scale exploration project at the new offshore Smith Bay acreage, which is in shallow waters on state oil and gas leases north of the federal National Petroleum Reserve–Alaska.

Multiple wells are planned there, Musselman said.

“Smith Bay is a long way from just about everywhere,” he said.

Caelus has already barged a great deal of the equipment, including a drill rig, to Point Lonely for its winter program. The company proposes to construct two separate ice pads and drill two exploration wells this winter. Musselman sees the Smith Bay prospect as having huge potential.

Caelus’ work on Nuna continues, meanwhile. The field, an onshore oil development that is near the offshore Oooguruk field, has an estimated 105 million barrels of reserves proven to date (it may ultimately be greater). While on track to meet its milestones with the state under its royalty modification agreement, the company has had to slow the pace on some items due to the significant drop in oil prices.

If the project at Nuna is successful there could be a second phase, “Nuna II,” built further to the west.

Last winter Nuna’s gravel access roads and a 20-acre production pad were built. This was a major civil project with 600,000 cubic yards of fill that took more than 27,000 individual trips by gravel trucks. The steel VSMs, or vertical support members, will be installed next for pipelines.

Fabrication of production modules will also begin and those will be moved to the Slope in mid-to-late 2016 from where they will be built in the NANA module fabrication plant near Willow. Certain pre-ordered equipment for the modules, such as turbines, is already stored at the NANA plant. There is already a camp built near the Nuna project location.

Matt Musselman said $100 million has been spent on Nuna in the last year alone.

Startup at Nuna is planned in the fourth quarter of 2017 with six producing wells and an initial rate estimated at 10,000 barrels per day.

“We will ramp up from there,” Matt Musselman said.

Two test wells at Nuna can be converted to producing wells with some “workovers,” Musselman said, and four more wells are yet to be drilled. The peak rate is estimated at 20,000 barrels per day to 25,000 barrels per day at full production. Under its royalty agreement with the state Caelus must have “sustained production” at Nuna by Oct. 17, 2017.

An unusual and costly aspect of Nuna is that while its production wells will be hydraulically fractured to stimulate production from tight reservoir rock, fracturing will also be done on its injection wells to allow for effective waterflood to the reservoir to enhance oil recovery.

This is an unusual technique and under its agreement with the state Caelus will make information to the public, which means other companies will be able to use it.

The formation Caelus has targeted for production at Nuna is the Torok, a tight, complex type of reservoir rock that contains a lot of oil but which will be technically challenging to produce. The Torok is found widely across the North Slope and if Caelus can successfully produce it other companies will be able to learn from the experience under the information-sharing agreement.

Musselman said the Torok is also believed to be present at Smith Bay, and other potential producing formations appear to lie below it. Caelus is confident there are hydrocarbons present, however.

“The seismic is really bright. It lights up,” he said, an indicator of hydrocarbons.

Just what kind of hydrocarbons is uncertain, however. Musselman hopes for oil but it could be natural gas, although in this case liquid condensates, a natural gas liquid, could also be present.

If there is a discovery in the Torok, however, it would be an important development for the North Slope.

“If we can make it work there (a commercial project) it might be ‘repeatable’ in other places,” in many other places on the slope where the Torok formation exists.

Tim Bradner can be reached at [email protected].

02/18/2016 - 10:49am