Search for new play leads Oil Search to Slope

  • Armstrong Energy CEO Bill Armstrong, left, and Oil Search President Keiran Wulff found mutual gain in the deal that’s brought the Australian-based company to the North Slope through the acquisition of Armstrong’s highly prospective discoveries in the Nanushuk formation. (Photo/Michael Dinneen/For the Journal)
  • Ed Kerr, director of Armstrong Energy, listens as Oil Search President Keiren Wulff discusses the deal that brought the Australian-based company to Alaska with a $400 million buy-in to Armstrong’s North Slope holdings. Wulff said he and Kerr “jousted” for about six months over negotiations in the deal. (Photo/Michael Dinneen/For the Journal)

The search for a new oil play took Keiran Wulff almost as far from his home as it could before he finally found what he was seeking.

The president of Sydney-based Oil Search Ltd. — a soon-to-be tenant on the North Slope — and Armstrong Energy CEO Bill Armstrong sat down with the Journal Nov. 6 in Downtown Anchorage to discuss their $850 million deal announced the week before.

Oil Search issued a press release Oct. 31 declaring it had reached agreement with Armstrong Energy and Denver-based GMT Exploration Co., a silent partner in the Pikka Unit, to buy a 25.5 percent stake in the Nanushuk oil prospect the unit holds along with a 37.5 percent share of Armstrong’s prospective “Horseshoe” leases to the south for $400 million.

Under the deal, Oil Search will become the operator of the Pikka Unit in June 2018 and take charge of developing the 1.2 billion barrel-plus Nanushuk field Armstrong discovered with the help of Spanish major Repsol. It also includes an option for Oil Search to fully buy Armstrong and GMT out of Pikka for another $450 million by July 2019, which Wulff said his company is “highly likely” to exercise.

Currently, Repsol holds a 49 percent share of the Pikka Unit, while Armstrong has 38.25 percent and GMT Exploration the remaining 12.75 percent interest, according to the Alaska Division of Oil and Gas.

Armstrong took the operator position at Pikka from Repsol in late 2015. The companies first partnered to explore the state lands between ConocoPhillips’ very large Kuparuk and Colville River fields in 2011. They have since drilled 18 primary and sidetrack wells to first discover and then delineate the Nanushuk play.

This winter, while Armstrong is still the operator, the company plans to drill an appraisal well and sidetrack in the southwestern portion of the unit, which has not yet been explored.

The exploratory Horseshoe well and sidetrack Armstrong drilled last winter about 20 miles south of the Nanushuk project area indicated the reservoir could hold more than 2 billion barrels of recoverable oil, Armstrong said in a prior interview with the Journal. However, the 120,000 barrels per day peak production estimate is based on the 1.2 billion barrels of proven reserves.

First oil is expected in the early 2020s and full development of the field will entail 146 wells and cost up to $5 billion to bring online.

Now about two years into the roughly three-year environmental impact statement process to develop Nanushuk, Armstrong, a geologist by trade, said he realized early on that the prospect of raising capital, which possibly meant going public, and growing his Anchorage staff of less than 50 by five-fold or more was not something he could, or really wanted to, tackle.

The ever-growing obligation was forcing his company to be the one to pump the brakes on the project while Repsol, State of Alaska officials and others were pressing for just the opposite.

“We’ve hit the ball so hard here, it’s like, ‘let’s do more; let’s do more,’” Armstrong said.

A highly energetic man who even talks at a breakneck pace (particularly for a Texan), slowing down is not in his makeup.

“It was rapidly becoming apparent that I was going to have to alter my company substantially if I was going to take this project to full development,” Armstrong said. “(Sometimes) you’ve got to give it up for adoption. I imagine the rest of my company was coming to that realization sooner than I did.”

At that point he and his leadership team began a fairly informal search to find a new partner.

And as it turned out, Armstrong didn’t so much find Oil Search as the two found each other.

An old friend of Armstrong’s happened to be a geologist with Oil Search and the two reconnected via email, talking shop and catching up on other life happenings. Eventually, Armstrong was invited to stop by Oil Search’s offices and meet a few folks the next time he was in Sydney — where his daughter also lives.

Some time afterwards Armstrong coincidentally found himself sitting next to Oil Search CEO Peter Botten at a dinner during the annual CERA Week industry mega-conference in Houston. The two quickly hit it off. Armstrong recalled Botten being attracted to his irreverent nature.

On the other side of the equation, Repsol leaders mentioned to Wulff, who was on the lookout for a new opportunity for his company, that they had a major prospect in need of another partner.

“Timing is everything,” Wulff said. “It’s sometimes better to be lucky than smart and frankly the confluence of circumstances where Bill’s friend works for Oil Search, I had a meeting with Repsol and they introduced me to the Alaska North Slope opportunity, and I thought, ‘gee, that meets a lot of our interests’ and when Bill met with Peter at CERA that really hollered at the fact that there might be something there and then poor old (Armstrong Director Ed Kerr) and I have been jousting for the last six months in terms of this asset.”

Search origins

Oil Search was formed in 1929 and until about 20 years ago was focused mostly on exploring in Papua New Guinea, where most of its holdings still are.

“We faced a very similar situation to what Bill and Ed faced 20 years ago when we had to make the decision: do we remain an exploration company or do we take that next move to a production company?” Wulff said. “We felt because we understood the country we would go to the next phase.”

Oil Search eventually bought Chevron’s Papua New Guinea assets in a deal that closed in 2003 and then quickly went from a firm with a couple hundred employees to a workforce of nearly 2,000, he said.

“Bill was exactly right; it’s a complete change in the dynamic of a company,” Wulff added. “You go from being a purely entrepreneurial, can-do company to having a lot more obligations and (being) much more process oriented. You can’t really afford to have mistakes.”

Today, Oil Search has about 1,300 direct employees, another 800 long-term contractors and is the largest employer in Papua New Guinea, according to Wulff. The company, which had $1.2 billion in revenue last year on $10.1 billion in total assets, also operates much of ExxonMobil’s drilling activity in the country.

Oil Search had been looking to grow outside of Papua New Guinea and supplement its primarily gas reserves with an oil play. However, company executives did not want to get into a project outside their familiar territory without an “in-country expert,” Wulff said.

“Anyone coming to Papua New Guinea should come to Oil Search, and they do. But in coming to the North Slope we wanted to make sure we were working with someone who had a really great record and frankly was a cultural fit for the organization as well,” Wulff said.

Prior to the Nanushuk project Armstrong also discovered the small North Slope Oooguruk field, now owned by Caelus Energy, in the early 2000s and later the nearby Nikaitchuq field developed by Italian major Eni.

“It’s a great time in the commodity cycle to (grow),” Wulff said, as oil prices appear to be pulling out of the three-year, sub-$60 per barrel trough they have been in. Oil Search equated the deal to buying into Nanushuk for about $3.10 per barrel.

North to Alaska

While the contrasts between the tropical South Pacific island nation and Alaska are obvious, Oil Search leaders believe the more subtle similarities and the company’s philosophy will help them make the move smoothly.

Wulff said Papua New Guinea’s indigenous cultures play a very large role in working on the island, and generally in everyday life there, as they do in Alaska. Just for example, he said the nation has roughly 800 tribes and a full one-third of the world’s languages.

That has led the company to work with a spirit of cooperation, with a goal of benefitting everyone in and around its projects, according to Wulff.

“We’re very focused on shareholder return but at the same time we compliment that with a real strong social conscience,” he said.

Oil Search is heading north with the intent to form cooperative relationships not only with its fellow Slope operators but also with the communities in the area — which is paramount if the company is going to stay on the Slope as long as its leaders hope.

“We have a different style of operating,” Wulff said. “It’s not that we’re soft, we’re actually quite ruthless with respect to our strategy and pursuing our strategy but we see the only way to have that success long-term is that all your stakeholders are engaged.”

Oil Search also has a partnership for support on the Slope with Halliburton, the large oil service company that assisted with operations after its deal with Chevron in 2003 and with a long history on the Slope as well.

Tapping into Alaska’s homegrown oil workforce that has been hit by industry layoffs of late should also help make for a smooth transition into the state, Wulff said.

After a few days of meetings with State of Alaska and other pertinent officials, the Oil Search executive said he has been reassured by the general support for the industry and the widespread goal of more oil production from the North Slope. Those meetings “enhanced” his confidence in Oil Search’s ability to be successful in the state.

And while many Alaskans often worry the state’s popular debate over the proper oil tax structure, Wulff added that after working in several Middle East countries in recent years Oil Search is excited to operate in a stable government environment.

“There’s always a balance between having the right fiscal terms that encourage exploration and the fiscal terms that ensure the community and the state get the right taxes; that’s a decision for the state,” he said.

The bottom line is “Oil Search is a company that’s focused on being here for a long time,” Wulff stressed.

Looking ahead

Over the next few months Oil Search will take over Armstrong’s Downtown Anchorage offices and likely staff up to 100 people or more in the coming year, according to Wulff, but that doesn’t mean Armstrong Energy is exiting Alaska.

Rather, a key part of the deal is that the companies plan to partner on future projects that allow each to maximize its strengths.

“I want to keep doing what I do best, which is explore,” Armstrong said.

Armstrong Energy now holds about 800,000 acres of leases on the Slope, of which the Pikka Unit is only about 15 percent, according to Kerr.

Over the next year to 18 months, the two companies along with Repsol will develop a strategy to evaluate the prospectivity of all those acres.

Armstrong said his company will be looking to repeat the Nanushuk play but noted he sees other opportunities as well.

“We’ve got a lot to do,” Kerr said.

Elwood Brehmer can be reached at [email protected].

11/08/2017 - 10:34am