Santos’ Progress at Pikka

Dingeman went into further detail in a presentation for Santos investors in November. “Typically, when you take FID [final investment decision] on a major project, the degree of engineering completion might be 30 to 40 percent. We had scopes that were up to 70 percent,” he explained. “So we took a very high level of definition into that FID.”

A decision to proceed had arrived only a few months earlier: in August 2022 Santos committed $2.6 billion for Phase 1 of Pikka. “The project will add further diversification to our portfolio and reduces geographic concentration risk,” Santos Managing Director and CEO Kevin Gallagher said at the time.

Fair Dinkum, Mate

Pikka sits on top of the Nanushuk formation, a geologic layer from the early Cretaceous Period, about 100 million years ago, when Dromaeosaurus skulked beneath gingko trees near what is now the Colville River. The river forms the eastern boundary of the National Petroleum Reserve-Alaska, just west of the Pikka leases.

The significance of the Nanushuk formation had been overlooked for decades until 2013, when the Pikka discovery well Qugruk 3 was drilled by Spanish energy company Repsol and Colorado-based Armstrong Oil & Gas. Further drilling in 2015 discovered economically viable flow rates, and more exploration to the south established Nanushuk as the largest onshore find in the United States since the ‘80s, with an estimated 768 million barrels of recoverable oil. The layer just beneath, the Torok formation, extends offshore and may prove to be even richer.

Repsol maintains 49 percent ownership of Pikka. Armstrong sold its majority stake in 2018 to Papua New Guinea’s largest energy company, Oil Search—no relation to Santos. At least, not until Santos and Oil Search completed a merger in December 2021.

Oil Search had set up headquarters in BP’s recently vacated Anchorage high-rise. Santos hung its shingle outside; within the building, Dingeman kept his role, becoming an executive vice president for Santos and its subsidiary, Oil Search Alaska.

When Oil Search bought into Pikka, the company expected first oil in 2023, based on a plan to invest $6 billion and produce 120,000 barrels per day. After crude oil prices dropped in 2020, the investment was halved, and Phase 1 was scaled down to 80,000 barrels per day. Last summer, in advance of the final investment decision, Repsol CEO Josu Jon Imaz forecast first oil in 2026.

“That’s our planning case,” Dingeman assured investors. “We’re looking for opportunities to accelerate that after Kevin [Gallagher] said that we were sandbagging. So hopefully, we can do a bit better than that.”

When Pikka changed hands from Armstrong to Oil Search, just three employees in Alaska were attached to the project. Three years later, the Oil Search workforce swelled to 150 by the time of the Santos merger. With the FID, the company enlisted an army of contractors.

“We’ve set up several large engineering, procure, fabricate contracts that are fixed price in nature,” Dingeman told investors. “So of our total spend, about 60 percent of that is fixed; the remaining 40 percent represents contingency and some unit cost labor. So we feel like we’ve really well positioned the project in spite of the inflationary environment that we’re in to maintain our promise on cost and schedule.”

That schedule was holding, as of Santos’ quarterly report in January, which contained this brief statement: “The Pikka Phase 1 project is progressing to plan with over US $800 million of contracts committed and fabrication of the processing facility modules underway. Modifications to the contracted drilling rig continue on schedule.”

The Phase 1 scope, according to a 2019 Clean Water Act permit, encompasses three drill sites for production and injection wells, a central processing facility, an operations center and camp, approximately 35 miles of pipelines, two bridges, and approximately 25 miles of roads.

Still, the road to Pikka has some obstacles. Literally.

Road Warriors

Pikka is situated near the Colville River village of Nuiqsut and west of ConocoPhillips’ Kuparuk River Unit.

“Pikka Phase 1 will execute a responsible development plan with a small surface footprint and utilize existing infrastructure, including the Kuparuk transportation pipeline and the Trans Alaska Pipeline System,” says Gallagher.

Exploration crews have been utilizing 75 miles of gravel roads across Kuparuk, with the permission of ConocoPhillips. The roads were built in the ‘80s by Arco Alaska, which was divested by BP during a 2000 merger and became part of Philips Petroleum, which joined with Conoco in 2002.

As Santos shifted from exploration toward production, the company offered ConocoPhillips $60 million for access to the Kuparuk roads, treating the payment as a courtesy for upkeep costs. ConocoPhillips countered with a request for $95 million spread over twenty years, noting that annual maintenance costs $15 million. The companies have been at loggerheads for more than a year.

To avoid slowing Santos’ momentum, the Alaska Department of Natural Resources last year permitted its crews to use the roads, free of charge for the time being. Acting Commissioner Akis Gialopsos concluded that the state reserves the right to grant road access on state lands, though he expressed hope that the parties would reach an agreement.

In response, ConocoPhillips filed a lawsuit in January challenging the permit. It argues that classifying the road as a public right-of-way is an unconstitutional taking of private property, citing the $1 billion replacement cost of the Kuparuk roads. The lawsuit asks the court to intervene in a legal gray area, since the state has no explicit rules for sharing roads, as it has for sharing pipelines.

A Shot in the Arm

Mobilization at Pikka occurred over the winter. Vertical piles were driven to set facilities on top, and a 185-bed camp was put in place. “We’ve started cutting steel and welding connections at the processing facility fabrication site in Airdrie, Alberta,” Dingeman told investors. “So that’s well underway, as well as work with other contractors and suppliers.”

The commitment by Santos and Repsol to progress with Pikka signals a “renaissance on Alaska’s North Slope,” according to Governor Mike Dunleavy.

For an oil industry workforce that shed nearly 3,000 jobs in the last three years, Pikka is a proverbial shot in the arm. Plans call for 2,600 jobs during construction of the production facilities and 500 ongoing during the field’s 30-year lifespan.

Through the development phase, Pikka plans were amended to account for local concerns, everything from moving a drill site farther from the riverbank to using light fixtures that minimize skyward glare. Santos also made agreements with Native corporations to offset the carbon emissions from Pikka operations, part of the company’s goal of net zero by 2040.

Offsets cannot account for carbon in the petroleum extracted from the ground, but the field itself is slated to emit 75 percent less greenhouse gasses than the North Slope average, based on a Wood Mackenzie benchmarking tool, or less than 14 tons of carbon dioxide equivalent per 1,000 barrels of oil produced.

Pikka’s compact size makes operations offsets possible. With up to fifty wells from one pad, Dingeman says the surface footprint of 20 acres can reach as much as 20,000 acres of subsurface. Gas turbines generate power for fully electrified equipment, and waste heat is recovered for processing purposes.

Jane Norman, Santos vice president of strategy, touts Pikka as the right project at the right time. “The project has strong fundamentals. It is located in a world-class oil producing province with significant existing infrastructure. It is going to be developed as a carbon-neutral project and is well supported by local stakeholders,” she says.

Total output from Pikka could reach 400 million barrels. The daily volume of 80,000 barrels would amount to 15 percent of oil carried through the Trans Alaska Pipeline System (TAPS).

Dingeman adds that Pikka’s output would increase the value of all crude oil in the pipeline because of the tariff structure. “The TAPS throughput cost is going to drop by $1 per barrel shipped, when our volumes enter that pipeline,” Dingeman explained to RDC. “That’s not just a benefit to Santos; that’s a benefit to our joint venture partner Repsol and it’s a benefit to the existing producers in the pipeline, and it’s a benefit to the state because the royalty barrels will be transferred at a lower cost.”

Further, Dingeman points to a “conveyor belt of opportunities” to follow up on Pikka. The portfolio of Alaska assets that Santos acquired also includes Pikka’s neighbors, the Quokka and Horseshoe units. Oil Search Alaska actively bid on state leases in November, picking up tracts adjacent to Quokka, just south of Pikka. That’s far enough away that it would require a new production hub, Dingeman warns, so development of those units is on a longer timeline.

Still, Dingeman says, “We’re really excited about the potential down there.”

The drilling rig for Pikka is arriving in April, just in time for the Australian hockey season. Dingeman expects to spud the first well there in the first half of the year.

“The project is off to a really good start,” he says, “and we look forward to being a significant cash contributor to the company in three and a half short years from now.”