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Oil Search Expands from the Tropics to the Arctic

Broadens portfolio, builds Anchorage-based team


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At first glance, it’s hard to imagine why Papua New Guinea-based Oil Search decided to venture into the Arctic after almost ninety years in the tropics. Their acquired assets, which they took operatorship of in March, include a 25.5 percent interest in the Pikka Unit and adjacent exploration acreage and a 37.5 percent interest in the Horseshoe Block. These leases contain the Nanushuk field, thought to be one of the largest onshore conventional oil discoveries made in the United States in the last three decades.

It could seem that oil and liquid natural gas development in the jungles of the island nation of Papua New Guinea (PNG) are as far removed as possible from the North Slope. However Ann Diamant, General Manager, Investor Relations and Communications at Oil Search, points out that Oil Search’s expertise operating in remote and challenging environments, combined with its ability to establish strong ties to local communities impacted by their work, has placed the company in a prime position to successfully operate the company’s newly-acquired Alaska assets. Oil Search is also building a highly-experienced Alaska operational and technical team based in Anchorage.

“In PNG we operate in extremely remote areas requiring detailed planning, logistics, and a focus on community engagement. We have also operated safely and efficiently throughout the Middle East in a variety of environments,” Diamant says. “Oil Search is focused on working closely with local communities and maximizing cooperation with other operators, and we see lots of opportunities to utilize these skills in Alaska.”

 

Armstrong

The substantial potential of the new acquired Alaska assets will be tested through a comprehensive exploration and appraisal program starting in early 2019.

Working with the Nuiqsut

Oil Search is currently in discussions with local community entities in Nuiqsut closest to the company’s areas of interest. To gain a better understanding of North Slope indigenous communities and to showcase its PNG activities, Oil Search brought four members of Arctic Slope Regional Corporation to PNG, providing a first-hand look at how the company works with local communities and what services it provides.

“The way that we work in PNG,” Diamant says, “is that we want to do things that are mutually beneficial for both the company and local people. Most of our staff is recruited from local villages or the province—83 percent of our workforce in PNG is [comprised of] PNG nationals—and we are actively involved in local business development. In our operated oil assets, our core services—such as transport, catering, and security—are all provided by local companies that Oil Search has helped set up and/or mentored. We want to make sure that our oil and gas activities benefit all stakeholders and are making life better for people in PNG. And, of course, we have to work closely with local regulators.”

As well as employment opportunities, Oil Search gives back to the country through a range of social programs, operated by the nonprofit Oil Search Foundation, which is dedicated to improving the lives of Papua New Guineans. Aside from the government, it is one of the largest providers of health and welfare programs for the country.

The wholly-owned, nonprofit foundation, which is primarily supported by Oil Search but also receives donor funds from a range of government and non-government organizations, focuses on health, leadership, education, and women’s protection and empowerment, aligning its work with the nation’s own development priorities and social objectives.

“In relation to our activities on the North Slope, the team in Alaska will work closely with the local community to build long-term relationships and ensure that any activity in the region is conducted in a way that minimizes environmental and social impacts to the community,” says Diamant. Oil Search has spent first few months since taking on operatorship in March talking to the local community and other operators to develop long-term plans. These discussions are still in the early stages, and plans to support sustainable development and opportunity creation initiatives will be developed in close consultation with the community over the coming months.

Potential impacts, however, continue to be a concern for some in the Nuiqsut community according to records from public meetings, reported Alaska Public Media.

Oil Search staff are reviewing comments from the community and key stakeholders from previous public meetings and will work with the community to identify solutions and mitigations, Diamant says.

 

Armstrong

The substantial potential of the new acquired Alaska assets will be tested through a comprehensive exploration and appraisal program starting in early 2019.

Balancing a Portfolio

The assets Oil Search acquired cost $400 million. Oil Search’s analysis to support their acquisition suggests that the Nanushuk field and satellite fields contain around 500 million barrels (gross) recoverable. However, their joint venture partner, Repsol, estimates that there are more than 1 billion barrels.

Diamant notes that the area requires some additional appraisal drilling (which is planned for next year) to confirm the size of the field, which has also recently been tested by the Putu and Stony Hills wells drilled by ConocoPhillips earlier this year.

“For some time, Oil Search has been seeking to acquire oil interests to complement our PNG gas assets, to create a more balanced portfolio that is less exposed to one single commodity and one country,” Oil Search Managing Director Peter Botten says. “The key challenge has been to achieve this without diluting the company’s world class, high-returning PNG assets. Utilizing our existing relationships, this Alaska North Slope opportunity has been proactively pursued and an agreement structured to the benefit of all parties.”

Alaska is not the company’s first departure from PNG, as it did have some oil interests in the Middle East. While the company discovered oil in Yemen, Egypt, and Kurdistan, the assets did not contain the same potential that the company sees in Alaska and were divested.

“The Alaskan interests acquired provide a unique opportunity for Oil Search to participate in a world class, high returning, proven oil province that can add material value to the company. Oil Search is also focused on establishing a quality joint venture focused on delivering full value from the assets. The option to acquire the remaining equity in the Nanushuk oil discovery and adjacent areas from Armstrong also allows us to increase our interest once appraisal drilling has taken place, as well introducing a strategic third party to create further value at the appropriate time,” Botten says.

The company’s desire to add oil interests to balance its portfolio is derived from having interests in a world-scale liquefied natural gas (LNG) project in PNG, with plans to double LNG capacity through a major expansion.

“We have a 29 percent interest in a world-class LNG project in PNG, operated by ExxonMobil PNG Limited. The project, which came on stream in 2014, has been a huge success—the project produced at rates 20 percent above nameplate capacity in 2017—and has put PNG on the world map as a reliable supplier of high quality gas. The country is very prospective for gas and we've discovered very substantial additional gas resources,” Diamant says.

In addition to the expansion of the existing PNG LNG project, Oil Search and ExxonMobil are also working with France-based Total; the two joint venture groups work cooperatively to develop new liquefaction capacity.

The need to include additional oil assets makes sense, as liquefied natural gas projects can take many years to bring online while oil projects are quicker to market. The diversification—both by region and commodity—will also help protect the company from potentially volatile markets.

 

Striking a Deal with Options

After more than five years searching for the right assets to balance its portfolio, in 2017 Oil Search got wind from one of its partners in PNG that Bill Armstrong was potentially looking at selling down or selling out some interest in Alaska.

“After a lot of analysis and discussion with Armstrong, we were confident that the quality of the assets, combined with Oil Search’s operating capability in challenging environments and our focus on community relations, made these assets a compelling case,” Diamant says.

The assets were purchased from privately-owned companies Armstrong Energy and GMT Exploration Company. And the timing could not have been better, with the transaction completed in early 2018.

“Timing is everything on these things,” Diamant says. “When we negotiated the purchase, the oil price had taken a bit of a dip, so the oil price represented in the transaction is a little lower than it is now.”

Oil prices have climbed back to more than $70 a barrel this year. Nonetheless, Oil Search notes that even in this favorable environment, the $400 million transaction is still a fair price for everyone involved. In addition to climbing oil prices, Oil Search has benefited significantly from the unexpected tax reform pushed through by the Trump Administration, which reduced corporate tax rates.

Nonetheless, because the assets are not yet proven, Oil Search took a conservative stance on the deal while booking an option at a set price: $450 million for acquiring additional interests.

The option, exercisable at Oil Search’s discretion until June 30, 2019, allows the company to purchase the remaining Armstrong and GMT interest in the Pikka Unit and the Horseshoe Block (25.5 percent and 37.5 percent respectively), as well as an additional 25.5 percent interest in the adjacent exploration acreage and 37.5 percent in the Hue Shale.

Though there appears to be a great deal of potential with the assets and despite the favorable timing, Oil Search was hesitant to plunge all the way into the Arctic cold on the North Slope.

“We were excited by the potential, but we are new to Alaska. We wanted to put our toe in the water and get a really good look at what we're acquiring before we took the next step,” Diamant says.

Additionally, the partnership with a proficient, proven explorer, such as Armstrong, has benefits for Oil Search. “We have a strong relationship with Bill Armstrong and his team. It’s an excellent partnership, as Bill and his team are proven explorers, while we've got more financial strength, skills, and expertise in partnering with local communities and landowners and are currently building an integrated Anchorage-based team to develop these assets,” Diamant says.

 

Building a Team

Given the mountains, lack of infrastructure, and remote nature of operating in PNG, as well as a short exploration season of about six months a year, Oil Search isn’t at a complete loss for how to operate on the North Slope.

“Logistics and operating in very remote areas is something we've been doing very well for decades, and we operate on behalf of some of the world’s major oil companies. However, in terms of operating in Alaska, we are complementing our existing skills of operating in challenging environments with the selection of quality technical, operational, and environmental specialists with many years of proven Alaskan experience with the existing majors operating in the state. We have been very pleased by the quality of the people wanting to work on this exciting project and we are developing a truly quality team,” Diamant says. “While we initially brought a team in from Oil Search to ensure we have the right culture and focus, we are ensuring that the majority of the staff are local people.”

And it should be no surprise that when it comes to a workforce with the skills to handle the development, Alaska has plenty to offer.

“We've been really, really impressed by the absolutely top rate quality of people applying for jobs,” Diamant says.

By the end of the year Oil Search will have a team of about one hundred people working in the Anchorage-based office.

 

Good News for ConocoPhillips, Good News for Oil Search

ConocoPhillips undertook its largest exploration program since 2002 this year, drilling six wells, including an additional Willow appraisal well on the North Slope. All six wells, plus a sidetrack, encountered oil and verified the potential of the play. The three Willow appraisal wells support the previously announced estimate of a recoverable resource potential of at least 300 million barrels of oil.

“The results of this year’s program are promising,” says Matt Fox, executive vice president of strategy, exploration, and technology at ConocoPhillips. “We are excited about the opportunity to extend our legacy in Alaska where we have a long track record of operational success and value creation.”

ConocoPhillips’ success on the North Slope is also good news for Oil Search.

“The Conoco drilling campaign this year has been absolutely fantastic,” Diamant says. “I think the ConocoPhillips wells are very important because they have really validated the play.”

Success stories, such as Conoco’s recent drilling season, further fuel the current administration’s desire to support the oil industry.

Former Alaska Department of Natural Resources Commissioner and current Assistant Secretary for Land and Minerals Management for the Department of the Interior Joe Balash said the agency is about to turn its attention to Willow “in a big way,” reported Alaska’s Energy Desk.

The administration’s aim is to speed up and simplify the environmental review process for projects such as Willow—which is good news for all of Alaska’s explorers and operators.  

Given rising oil prices, federal support for the oil industry, and state support, it is no surprise that Oil Search is happy to have found such strong assets to balance its portfolio.

“We're very comfortable with the acquisition, very happy to be in Alaska,” Diamant says. “We are building our team and doing a lot of listening to the community and other operators. We're kind of taking it slowly. We're not rushing into things. We'd certainly like to see a comprehensive drilling program in the next season, that's certainly our intention, subject to agreement with partners, the local community, and regulators.”

The exact cost and scope of the drilling program have yet to be set; however, once the team secures the necessary agreements and jumps through regulatory hoops, they’re ready to see what 2019 holds for them beneath the Arctic Tundra.

“We'd like to go forward with the development. The aim would be to make a decision to enter front end engineering and design in 2019 and make a final investment decision in 2020. And get to first oil production by 2023,” Diamant confirms.

 

 

Isaac Stone Simonelli is a freelance journalist and former managing editor for the Phuket Gazette.

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