AIDEA revises Mustang investment to spur production

  • Brooks Range Petroleum Corp. President Bart Armfield. (Photo/Michael Dinneen/For the Journal)

Brooks Range Petroleum Corp. has the go-ahead from state regulators and funders to scale back its Mustang development in order to get the long-delayed North Slope oil project into production sooner.

On May 31 the Alaska Industrial Development and Export Authority board of directors unanimously approved a pair of resolutions that shift the authority from being an investor-owner in Mustang infrastructure to a lender for Brooks Range’s parent company, Caracol Petroleum LLC.

AIDEA will sell its interest in the holding companies — Mustang Operations Center-1 LLC and Mustang Road LLC — that were set up under the original deal for the project’s processing facilities and the five-mile gravel road and pad needed to access the site.

Specifically, AIDEA will finance the purchase by Caracol of MOC-1 for $52.5 million and its membership in the road and pad company for $8.5 million plus enough to cover the authority’s investment costs, according to a memo accompanying the resolutions.

The loans will be amortized over the time the project is producing oil. The authority will also get options in Alpha Energy Holdings Ltd., which is Caracol’s parent company.

AIDEA Executive Director John Springsteen said prior to board approval of the terms that continuing to support the Mustang project is consistent with the authority’s economic development mission and with the state’s broader goal of getting more independent companies to develop oil projects on the North Slope.

Fairbanks businessman and board member Bernie Karl, owner of the popular Chena Hot Springs Resort, suggested AIDEA has “bent over backwards” for Brooks Range and authority staff should’ve insisted on a stake in the project’s oil production in exchange for its financing help, but voted in favor of the plan.

“The best time to plant a tree is 30 years ago. The second best time is today,” Karl remarked. “Today we are planting a tree.”

Deputy Commerce Commissioner and board member Fred Parady said helping Brooks Range reach sustained production will ultimately provide the company and its owners the cash flow needed to meet their obligations as well as move the state forward with a new North Slope development.

Mustang is in the small Southern Miluveach Unit on the southwest edge of the large Kuparuk River Unit. It’s estimated to hold 33 million barrels of proven and probable light oil reserves, according Brooks Range. Peak production estimates for the field have been in the range of 15,000 barrels per day.

Full development was initially pegged at $580 million, but now is estimated at greater than $750 million, according to AIDEA. It is expected to generate $230 million in state royalties over the 20-year production period.

“The true way to monetize this investment is to make it produce and I think it moves us much further down the road of achieving that objective,” Parady said.

AIDEA leaders have been debating nearly continuously over how to handle years of delays in the project.

The authority first 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 in December 2012. At the time Brooks Range leaders said they hoped to have Mustang in production by late 2014.

The gravel road and pad — in which AIDEA is an 80 percent owner — were finished in April 2013.

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.

In February 2016 management for the authority and Brooks Range agreed to put Mustang in “warm standby” as oil prices in the $30 per barrel range hampered the ability to secure other financing options.

Company leaders subsequently told state officials in regulatory filings that Mustang would produce in late 2017, but apparent financing problems ended that prospect.

Armfield, now president of Brooks Range, told the Journal in January that the company is also owed more than $40 million in tax credits from the state.

The AIDEA memo states that discussions with other potential financiers “made it clear that long-term, third-party financing will only be available for MOC-1 and the (Southern Miluveach Unit) with a definitive demonstration of the capacity/capability of the Mustang field.”

Last June AIDEA invested another $2.5 million in MOC-1 to help maintain installed equipment and secure the original investment.

On May 31 the AIDEA board also approved a $1 million line of credit to MOC-1 from the Economic Development Account of the authority’s Revolving Fund as “bridge financing” to continue work on the project, according to a second memo from the authority.

Brooks Range has less than $200,000 remaining from the $2.5 million that has gone to operational costs such as storage fees and taxes, the memo states further.

Repayment of the credit line is to be included in the loan for the transfer of the MOC-1 assets from AIDEA to Caracol.

On May 7 the state Division of Oil and Gas approved changes to Brooks Ranges’ plan of operations for the Southern Miluveach Unit and Mustang that the company hopes will finally get the project off the ground.

The company plans to install a turnkey “early production facility” with the capacity to produce up to 6,000 barrels of oil per day, which will be trucked to nearby facilities for processing, the filings with Oil and Gas state.

Armfield said the company is working to finalize a contract for the early production facility, but declined to comment much further, saying the company would be able to provide more information about its work in the near future.

Last fall Brooks Range conducted a flow test of the North Tarn 1-A well on the Mustang pad that produced peak oil flows averaging nearly 1,300 barrels of crude per day with only small amounts of water, according to a company statement at the time.

Based on that flow test, Brooks Range leaders developed a new plan around the smaller, early production facility that could have it producing roughly 2,000 barrels per day in the first quarter of 2019 and up to 5,000 barrels per day by the end of the year.

According to the AIDEA loan documents, Brooks Range will drill laterals off of existing wells this year to access the oil.

Elwood Brehmer can be reached at [email protected].

06/06/2018 - 10:29am