Oil prices, policy uncertainty prompt Caelus to postpone well

  • The Tulimaniq well at Smith Bay on the North Slope is seen in this Caelus Energy image. After heralding what they believe to be a major discovery in 2016, plans for an appraisal well to prove up the find have been put off based on sustained low oil prices and state policy uncertainty on tax incentives. (Photo/Courtesy/Caelus Energy)

Caelus Energy won’t be drilling new wells on the North Slope next winter for a host of reasons.

As a result, Alaskans will have to wait at least another year to see whether the company’s promising but remote Smith Bay oil prospect, which Caelus leaders have touted to be a 6 billion-barrel discovery, lives up to its billing.

The company had planned to drill a production-like appraisal well at Smith Bay in early 2018 to prove up what its two early 2016 exploration wells and detailed 3-D seismic data indicated — that Smith Bay could produce upwards of 200,000 barrels of oil per day.

However, Caelus spokesman Casey Sullivan said in an interview that the company wants to advance Smith Bay as quickly as it can but “lower for longer” oil prices and the continued dismantling — on a couple of levels — of the state’s oil and gas tax credit program are impeding progress.

Smith Bay is a very remote prospect about 125 miles northwest of existing central-Slope oil infrastructure and about 70 miles east of Barrow. While its location, size and the unavoidable long-term nature of North Slope projects means development will assuredly take at least five years or more and ostensibly makes current oil prices meaningless for Smith Bay’s commercial viability, prices have impacted revenue from Caelus’ Oooguruk development, the company’s only sustained revenue source.

Smith Bay’s location makes even a small winter drilling program a $100 million-plus venture, according to Sullivan.

And despite indications for months that there was bipartisan agreement in the Legislature, with support from Gov. Bill Walker, to end the cashable tax credit program on the North Slope, Sullivan said House Bill 111 did impact the decision to delay drilling again at Smith Bay.

“Any prudent investor, any prudent company will take pause and make sure we understand what the next layer of rules might be before we make significant investments,” he said.

The final version of HB 111 is currently being debated in the Legislature. Both the House and Senate versions of the bill cut refundable oil tax credits from state law Jan. 1, 2018, just before Caelus would have drilled the Smith Bay well. While the Senates bill does little else, the Democrat-sponsored House legislation would also increase taxes on the state’s large producing fields and restrict how companies can utilize future production tax deductions.

Last November Caelus Energy Senior Vice President Pat Foley said at a Resource Development Council of Alaska conference that the company had been told on no uncertain terms that “the ongoing liability that’s created by the refundable tax credits is just not sustainable by the state.”

In the same speech Foley said Caelus was planning to drill an appraisal well at its prized prospect and hoped to drill two exploration wells on state acreage it holds east of Prudhoe Bay in early 2018.

Sullivan said at this point Caelus doesn’t have work planned for its eastern Slope holdings anymore, either.

Caelus has also applied for roughly $200 million in tax credit certificates, more than $100 million of which are past due for payment from the state due to Walker’s vetoes of $630 million in credit payments since 2015, according to Sullivan.

Walker vetoed the tax credit payments — and drew sharp criticism from Republican legislators and the oil industry for it — contending the state could not afford to pay down the obligation while continually battling $3 billion budget deficits without a long-term fiscal plan.

Additionally, Sullivan said low oil prices and activity elsewhere have made rounding up private support all the more challenging these days.

“We believe, based on our science, that there’s more than 6 billion barrels in place (at Smith Bay), but it still takes money to get out there and prove up that resource and again there’s intense competition for that capital currently under the price environment and under what we’re seeing happen in the Lower 48, particularly in the (Texas) Permian basin, where you have the ability to — I’d leave it at there’s intense competition for capital,” he said.

Caelus, a small independent, receives significant funding from Apollo Global Management LLC, a New York-based private equity investment firm along with financing through debt from other lenders, according to company leaders.

Some state officials and independent industry representatives have noted Caelus’ tight oil find at Smith Bay is unequivocally encouraging, while at the same time trying to temper optimism about it, saying it is far from proven absent a flow test from an appraisal well.

And if Smith Bay in fact is as large as Caelus purports, full development would still require leaping a series of regulatory and economic hurdles given its remoteness and location adjacent to the federally owned National Petroleum Reserve-Alaska, which any access road or pipeline would likely have to cross.

As for what Caelus already has in production, the company is undertaking a well workover program to get the most oil it can out of its small Oooguruk field.

“It’s a multimillion-dollar investment to go back in and hope to optimize production from some of the wells we’ve already drilled,” Sullivan described.

Caelus stopped drilling at Oooguruk for the first time in seven years last spring when sustained low oil prices and the issues with the state’s tax credit payments made new investment challenging, company leaders said. Oooguruk is currently producing about 15,000 barrels of oil per day.

According to Foley about 40 wells have been drilled at Oooguruk and Caelus wants to drill another eight.

The company also holds the sanctioned-but-suspended Nuna project on the North Slope, which with about $1 billion of capital could start producing in two years and peak at about 20,000 barrels per day whenever North Slope oil economics improve.

“We’re still super bullish on Alaska and we’re ready — as soon as we get some stability in price and policy — we’re ready to get moving forward again,” Sullivan said.

Elwood Brehmer can be reached at [email protected].

06/21/2017 - 12:48pm