How COVID-19 Prompted Oil Search to Pivot at Pikka

The 2020 season produced tangible results as well.

“Our team delivered basically the largest civils program on the Slope in over twenty years, and at its peak included over 800 workers,” Dingeman told investors.

Those projects included laying 3.2 million cubic meters of gravel, sourced from the Arctic Slope Regional Corporation and North Slope borough gravel pits, to install three pads at the Nanushuk B drill site, and an 11.5-mile road that provides year-round access from Pikka to existing infrastructure.

Oil Search also completed construction of a production facility and operations center and built a 192-foot bridge across the Miluveach River using lightweight precast girders.

Phased Development at Pikka

The pandemic and subsequent downturn in oil prices meant that Oil Search’s former concept for the development of the Pikka Unit was unworkable, Dingeman told Meet Alaska attendees, which led the company “through a recycle process to take costs out.”

Part of that recycling included a switch to a phased development approach that, though initially smaller in scale than originally envisioned, will ultimately yield a greater return on investment at a reduced cost.

Phase 1 of the Pikka project reduces the number of drilling pads from three to a single drill site in the core of the Nanushuk Drill Site B, or NDB, and includes a flowline that will allow the project to be connected to existing North Slope infrastructure, Dingeman said. The processing facility will use a standardized modular design and off-the-shelf equipment. Not only can the modules be expanded to accommodate future phases but their ability to be transported by road lowers costs and reduces the risk of project delay.

“We went from a large sealift bespoke solution to a modularized, standardized solution for that processing kit,” Dingeman told conference attendees. “It can be sourced in a way that can be transported by road and not sealift, which avoids seasonality and gives us more flexibility.”

By starting production with modular processing facilities, the company should be able to achieve about two-thirds of its initially planned production capacity at about half of the cost, with a shorter period to first oil.

Phase 1 represents a $3 billion commitment, with first oil expected in 2025 at a production level of 80,000 barrels per day, Dingeman told Meet Alaska attendees. Two-thirds of that commitment will go toward facilities and construction, including 100 miles of infield pipeline, and one-third to the wells.

Roughly 75 percent is expected to be spent prior to first oil and will generate not just jobs and business development opportunities but taxes, royalties, and other revenues for the state and regional and local communities, he said. Contracts are expected to begin being awarded sometime in 2022 to 2023, with production operations support being tendered in 2023 to 2024.

“So even though the benefit of our production won’t be realized for four years, the benefits [of the development] will be felt sooner,” Dingeman says. “That’ll be a big shot in the arm to Alaska, and we’re keen to get on to that.”

But, he added, the pivot doesn’t mean that Oil Search has lost sight of the “total value prize,” which he said the company will realize during the project’s second phase.

“We’ll unlock a comparable volume from the already permitted drill sites of [Nanushuk] A and C, [so] another 350 to 450 million barrels,” he said.

The Phase 2 increment, which would include expansion into the Nanushuk A and C drill sites and the Mitquq first drill site, will come on the heels of Phase 1, with oil from Mitquq likely being processed through Pikka facilities during Phase 3. The company anticipates that future phases of the project will be funded by cash flow from Phase 1.

“Mitquq, we believe, covers a similar geographic area as Nanushuk does in the Pikka unit, so it needs some further appraisal,” he said. “What we’re looking at there is 40,000 barrels per day module… but the intention is to appraise that the following drilling season, once we have personnel and equipment in that area.”

Dingeman told investors that the key takeaway from the phased approach is that it can deliver a very efficient, high-return project.

“The phased approach really opens the door with an initial high-return, low-cost development, which we followed by subsequent phases that will benefit from both the learnings from the first phase as well as the cash flow it generates,” he said in November. “It really represents a commercialization pathway that goes way beyond the volume we initially envisioned.”

Phase 1: FEED

In February, Oil Search entered the front-end engineering and design (FEED) stage, moving the company one step closer to implementing its phased Pikka development plan.

“This is a key milestone toward realizing material value from our Alaska assets and creating long-term benefits for the North Slope community and jobs for Alaskans,” Managing Director Kieran Wulff said in February. “Through FEED, we expect to deliver a more detailed and robust project that further reduces risk and improves the project’s value.”

The FEED stage is focused on finalizing the project’s design scope, execution, budget, and schedule. This stage is also used to reduce project risk to make sure the final design supports optimal expansion to deliver full value from the Nanushuk reservoirs in advance of reaching a final investment decision (FID) by the fourth quarter of 2021.

“The second quarter of 2021, it is really about completing the detailed engineering work and progressing that,” Dingeman told Meet Alaska attendees. “It’s about preparing implementation plans, getting the contracts ready to execute at approval of FID, and preparing for internal controls and economics.”

Engineering and design work during FEED will include final designs of the modular production facility, infrastructure for initial drill site NDB, pipelines, and operations pad infrastructure. Plans include forty-three wells and a 20-acre pad, Dingeman said.

Oil Search will also begin detailed engineering and procurement for its Seawater Treatment Plant. The US Army Corps of Engineers has already issued key environmental permit modifications, and the standalone treatment plant has already been incorporated into the development plan, the company says.

“This provides several benefits,” Dingeman explained. “One, it gives us greater supply surety of water. It also gives us an improved water quality versus having sourced waters from others.”

Asset Divestiture

In 2019 Oil Search exercised its $450 million option to buy out Armstrong and GMT Exploration, giving the company a 51 percent interest in the Pikka Unit alongside its Spanish-based partner Repsol, which holds a 49 percent interest.

Now, it’s resumed efforts to divest itself of a 15 percent interest in the development, either solely or in conjunction with Repsol, and to secure financing to fund at least one-half of the Phase 1 costs. The goal of the divesture is to free up cash to fund the development and reduce the development of CapEx in subsequent phases.

But while the sell-down is a critical component of Oil Search’s capital management strategy, Wulff was quick to point out that the company wasn’t poised to accept just any deal to raise capital.

“Alaska isn’t for sale at any price,” he told investors. “For us, it’s about the quality of the deal. It’s about the quality of the partner. We’ll look at any proposal, but we will need to recognize the value of the asset; otherwise, it’s actually in our shareholders’ interests to find funding to take it forward.”

Regardless of whether divestiture occurs or Oil Search secures alternate funding, Wulff said the confirmed 2C resources combined with the Pikka development’s Phase 1 revenue stream will create support for further growth—it’s “an exciting” time for Oil Search in Alaska.

“We are exceedingly optimistic about Oil Search’s future in Alaska,” he said.