AIDEA forecloses on Mustang assets after $70M investment

  • Crude oil is loaded to a tanker truck at the Mustang Operations Center near the Kuparuk River field on the North Slope. After $70 million invested and multiple loan modifications for several owners of the Mustang oil prospect, the Alaska Industrial Development and Export Authority took over the project assets in December. (Photo/Courtesy/Alaska Industrial Development and Export Authority)

Leaders of the state development bank now must decide what to do with a failed North Slope oil project in which they have invested $70 million.

The Alaska Industrial Development and Export Authority took control of the Mustang project in December following years of fits and starts by former operator Brooks Range Petroleum Corp. that ultimately led the state-owned authority to foreclose on the project assets.

Approximately a year ago the AIDEA board of directors approved what ended up being the last in a series of amendments to its $70 million total equity investment in Mustang, which had previously been morphed into a loan to Brooks Range’s parent companies.

The January 2020 loan modification came after Singapore-based Caracol Petroleum, a majority owner in Brooks Range, failed to make its first two $3.1 million quarterly payments to AIDEA on a $64 million loan to Caracol that the authority approved in May 2019.

The amended loan agreement called Caracol’s parent company, Singapore-based Alpha Energy Holdings to commit $60 million for project development by mid-April last year and repay a $10.5 million loan AIDEA made to Mustang in 2019 when Brooks Range failed to meet development targets.

However, when Alpha again failed — despite relaxed loan terms — to meet its obligation AIDEA began searching for a partner to lead the project.

Majid Jourabchi, President of Houston-based Thyssen Petroleum, a 35 percent owner in Anchorage-based Brooks Range, told the Journal last May that he was part of a team of investors attempting to buy a majority stake in Mustang from Caracol, a 65 percent owner in Brooks Range, according to state business records.

The current Brooks Range ownership group is the latest in a series of convoluted structures since oil prices first fell in 2014 and funding for the project became scarce.

The Mustang field is adjacent to the southern portion of ConocoPhillips’ large Kuparuk River field and also near the Pikka oil project being developed by Oil Search. The field is estimated to hold about 22 million barrels of oil and could peak at production rates of about 12,000 barrels per day when fully developed.

Brooks Range drilled test wells at Mustang in 2011 and 2012 that led AIDEA in December 2012 to take a stake in Mustang with $20 million investment in the holding companies set up for the project’s infrastructure.

The $20 million funded the lion’s share of work to build a five-mile access road and a 19-acre drilling and facility pad. The gravel road and pad — in which AIDEA was an 80 percent owner — were finished in April 2013.

The road and pad have since been used by other oil companies as an access route and staging area for winter exploration drilling programs.

In 2014 the authority put another $50 million toward the originally proposed $225 million processing facility that gave it a 96 percent stake in the holding company, Mustang Operations Center-1 LLC.

Full development of the field was estimated to cost about $580 million at the time and included drilling 11 production and 20 more gas and water injection wells, according to AIDEA’s project documents. Brooks Range later changed its plans to utilize smaller, modular production facilities to spur development.

Brooks Range leaders said when AIDEA made its first investment that they hoped to have Mustang in production by late 2014 and said when AIDEA made its second payment to the project oil would start flowing in late 2015.

The Department of Revenue made the $22.5 million loan to Mustang Operations Center-1, or MOC1 LLC, in October of 2015 to provide the Mustang project operator, Brooks Range Petroleum Corp. with the capital to continue advancing work on the small oil development.

It followed a partial veto of the state’s annual oil and gas tax credit payment by then-Gov. Bill Walker as the state deficit ballooned while oil prices fell. Global oil prices fell in late 2015 before bottoming out at less than $30 per barrel in early 2016, a situation that made it difficult for Brooks Range to secure construction capital, leaders of the small Anchorage-based independent said at the time.

Legislators ordered a review of the loan by their auditors, who concluded in a report released in November that the loan was inappropriate because it potentially created a conflict of interest for the Revenue Commissioner but it did not violate any state laws.

Brooks Range briefly started production from the small field in November 2019 through temporary facilities after years of delays but funding issues precluded additional development and sustained production.

According to documents submitted to the state Division of Oil and Gas, AIDEA took control of the Southern Miluveach Unit that holds the Mustang project through Mustang Holdings, a wholly owned subsidiary of the authority that was formed Sept. 21, 2020.

AIDEA officials had been in discussions with Finnex LLC, a newly formed company owned by Thyssen Petroleum Alaska and led by Jourabchi, according to state business records.

Jourabchi did not return calls in time for this story.

The authority informed Oil and Gas officials in late October that a deal for Finnex to become the operator of Mustang could not be reached and the project would remain in cold shutdown while officials pursued a new operator.

Oil and Gas Director Tom Stokes required Mustang Holdings to provide a year-end report on any progress made to find a new operator and advance the project in early December when approving the Southern Miluveach Unit plan of development for this year.

AIDEA Executive Director Alan Weitzner wrote to Stokes in a report dated Dec. 28 that Mustang Holding had assumed storage contracts for project equipment; was working on a security contract for the project infrastructure; and had paid annual rent for the Southern Miluveach leases. AIDEA had additionally set up a data room and had entered into confidentiality agreements with several “qualified parties who are capable of operating and/or providing capital required for the intended full SMU development drilling program.

“Mustang Holding and major creditors that have recorded liens in connection with prior work on the SMU have been and continue to work closely to finalize plans to advance the resumption of development activities,” Weitzner wrote.

AIDEA executives have declined multiple requests for interviews over the years that it has been involved in the project and a spokeswoman for the authority did not respond to questions in time for this story.

Elwood Brehmer can be reached at [email protected].

01/20/2021 - 9:49am