Merger may shift timing of Pikka development decision

The future of the multibillion-dollar Pikka oil project on the North Slope is unclear, but what is almost certain is that it will be changing hands for the third time in six years.

Papua New Guinea-based Oil Search, which owns Pikka, announced a merger with Australian-based Santos Ltd. Sept. 10 that will collectively give current Santos shareholders 61.5 percent ownership in the new venture, according to a joint statement from the companies.

Leaders of the South Pacific producers confirmed in early August that they were in negotiations and on Sept. 6 publicly extended a due diligence review period for the deal by one week.

Oil Search bought into Pikka in the fall of 2017, when it agreed to an $850 million deal with then-operator Armstrong Energy and a silent minority owner to take a 51 percent stake in the project over two payment tranches.

Armstrong Energy, a Denver-based explorer, had taken over the operator position at Pikka from Spanish major Repsol in late 2015.

Repsol remains a 49 percent working interest owner in the project.

Oil Search has since finished permitting the overall Pikka development plan and has all of the gravel laid that it needs to commence construction of the facilities for a first, scaled-back phase of the project, Oil Search Alaska Subsurface Senior Vice President Mark Ireland said during a Sept. 9 presentation to the Alaska Support Industry Alliance, a resource industry trade group.

Ireland said shortly before the formal merger announcement that Oil Search leaders expected to make a final investment decision, or FID, on the $3 billion first phase of Pikka this year.

“The headwinds from the merger may cause some issues (with the decision) but the team’s dedicated to delivering what we need to,” he said Sept. 9.

Santos and Oil Search are similarly situated firms, according to Ireland, who said they are both primarily regional gas players that also already jointly own some assets in Papua New Guinea and are looking for opportunities to grow outside of that area.

“That’s why Oil Search came here (to Alaska),” he said.

Santos spokesman James Murphy, in responding to emailed questions about what the deal means for Oil Search’s Alaska assets, referenced an August statement from Santos officials that said they “would be supportive of Oil Search working towards (front-end engineering and design) and FID as publicly announced.”

Oil Search Alaska spokeswoman Amy Burnett wrote via email Sept. 14 that the company’s Alaska employees were waiting to learn more about what the merger means for their work as well.

Oil Search leaders stressed in the joint announcement with Santos that the merger will give their shareholders the ability to participate in a larger company with greater access to capital.

“The combined entity will have the capacity to deliver on an exciting pipeline of organic growth opportunities,” Oil Search Chairman Rick Lee said.

Current Santos CEO Kevin Gallagher will lead with the combined company, according to the joint statement.

“The merger will create a company with a balance sheet and strong cash flows necessary to successfully navigate the transition to a lower carbon future with the combination of Santos’ leading (carbon capture and storage) capability combining with Oil Search’s ESG programs in PNG and Alaska to provide a strong foundation.”

Santos and Oil Search are expected to have a combined market capitalization of approximately $15 billion.

Oil Search shareholders are tentatively scheduled to vote on the merger Nov. 29 and the deal would then be effective Dec. 2 if it is approved, according to a timeline provided by the companies.

Oil Search leaders slowed the pace of work at Pikka and significantly revised their plans last year after the economic realities of the pandemic forced them to cut approximately $80 million from what was a $400 million North Slope capital plan for 2020.

“We were knocked flat in the dirt and had to pick ourselves up,” Ireland said of 2020. “We had planned to have a much larger facility and three drill sites instead of one but with the collapse in oil prices and issues around the pandemic we had to regroup and that’s what we did.”

What resulted was the current plan for a single drill site capable of producing up to approximately 80,000 barrels per day from 43 total injector and producer wells with startup in 2025.

Oil Search Alaska applied with the state as recently as mid-2019 to move its original first-oil target of late 2023 up a year to produce up to 30,000 barrels per day starting in 2022. At the time the company envisioned a $5 billion project capable of production upwards of 120,000 barrels per day.

As it stands, the current Pikka plan incorporates truck-able modular facilities that will give project managers flexibility in the logistics and timing of the development, according to Ireland.

Oil Search leaders have openly acknowledged the fact that the company has had a difficult time securing funding for the project and Ireland said it stems at least partly from the large banks and other lenders that will no longer finance Arctic oil and gas projects.

“We’re not leaving any stone unturned and we’re making, I’ll say, good progress but it’s not an easy road to travel right now,” Ireland said of financing Pikka.

Industry analysts have said the increasing reticence in the finance world towards Arctic oil and gas developments would have little impact on the largest producers on the North Slope, such as ConocoPhillips and ExxonMobil, which have other avenues for funding, but would likely impact mid-sized companies looking for large amounts of development funding such as Oil Search.

At the same time, many analysts also insist that Pikka will almost certainly be developed at some point given its location on state land between ConocoPhillips’ mature Kuparuk River and Alpine oil fields and its relatively shallow, conventional Nanushuk oil resource, regardless of which company ultimately starts producing it.

Elwood Brehmer can be reached at [email protected].

09/15/2021 - 10:11am