|
Badami royalty mod granted
Wringing oil out of E. North Slope unit continues with determined operator
Kay Cashman Petroleum News
Extending the life of the eastern North Slope Badami unit through royalty modification allows for future exploration and development in the area with less additional infrastructure construction meaning less environmental impact. This was one of several reasons that on July 7, Alaska Department of Natural Resources Commissioner John Boyle granted Badami operator Savant Alaska royalty modification on all seven of the Badami unit leases.
(See map in the online issue PDF)
"Savant provided sufficient technical and financial information to substantiate its application - clearly showed that the per-barrel cost increase was sufficient to make future production no longer economically feasible without royalty modification," the decision read.
The approval took into account the explorers who have obtained strategic positions around Badami. They expect to be able to utilize Badami's infrastructure should their exploration efforts lead to development. The explorers include Bill Armstrong's Lagniappe Alaska, Oil Search (Alaska) and Balcony Natural Resources.
Developments in the vicinity of Badami would result in increased throughput through the Badami pipeline system and through its underused processing facility, and thus through the Trans-Alaska Pipeline System.
Additionally, Boyle said, bidding for leases in the Beaufort Sea region has been a staple during recent areawide lease sales, and DNR expects this interest to continue in the future.
Unsurprisingly, DNR analysis found that the presence of oil and gas infrastructure matters to lease sale participants and promotes continued interest in areas around Badami.
Additionally, Badami operator Savant has a proven track record of safety and compliance. In the close to eight years of operating on the North Slope, the company has had no lost time accidents.
Furthermore, the seven leases comprising the 17,203.74-acre Badami unit have provisions encouraging the lessee to employ Alaskans. Glacier Oil & Gas Corp., Savant's parent, is "focused solely on Alaska -- operating both onshore and offshore oil assets."
Companywide, roughly 90% of Glacier employees are Alaskans, Boyle noted in his decision.
Glacier employs roughly 55 individuals and an additional 25 full-time contractors, both in the Cook Inlet basin and North Slope fields and at its headquarters, which is in Anchorage. Badami currently has 20 employees, not including full time contractors.
New owner a factor At Badami, Savant operates the field in addition to owning drilling, production processing and transportation infrastructure all of which provide Savant with opportunities for its own production growth, the decision said, referencing the investment capability and plans of Glacier's Savant under its new owner SEP Alaska LLC.
MidCap Financial Investment Corp. transferred ownership in Glacier, and indirect ownership of Glacier's subsidiaries, including Savant, to SEP Alaska effective Nov. 1, 2022. SEP Alaska is 50% owned by Pontem Energy Capital and 50% owned by Sweat Equity Partners LP.
Petroleum News has reported on some of Savant's plans, such as the ERD Killian 28 exploration well planned for this coming winter to test a Killian objective offshore to the northeast of the onshore Badami facility and the planned re-drill of West Kavik Unit #1 on the Grey Owl leases south of Badami during the winter of 2026-27.
Also, when Savant applied for royalty modification the company indicated that granting royalty relief would enable it to invest in future wells on the Main Pad as well as on a proposed new East Pad.
In the company's 20th plan of development for Badami, filed April 18, Savant said the upcoming Killian winter exploration well will prove up the extensive Killian play beyond the Badami Sands participating area, or PA.
The company said it will continue to refine, characterize, and de-risk the prospects related to the Killian sands outside of the PA.
The company also said it "will engage in G&G evaluation of newly acquired acreage (1,280 acres south of the unit, 2,560 acres west of the unit, and 427 acres north of the unit).
Badami East Pad In the 20th POD period Glacier said it will continue compliance and engineering work related to infrastructure, tie-in, and additional processing requirements for the new Badami East Pad.
The Badami Main Pad houses the processing facilities, and the proposed Badami East Pad will serve as a satellite and tie-in to the Badami Main Pad, gathering production from new wells drilled from the new Badami East Pad.
Boyle's decision noted that Savant has at its disposal Glacier's experienced professionals and a committed board and executive team.
Badami development history The Badami oil reservoir on Alaska's eastern North Slope lies both offshore in Mikkelson Bay and onshore just east of the Shaviovik River Delta.
The Badami oil field, which produces from the Badami and Killian sands, was discovered in 1991 by Conoco and Petrofina, with nearby exploration wells drilled in the 1970s by Humble, ARCO and Mobil.
In 1993, BP Exploration (Alaska), or BPXA, acquired a 70% interest and operatorship in the leases that would become Badami.
BPXA formed the Badami unit on March 13, 1995, with Petrofina being the minority interest owner. Field development began in 1996, and by 1998 a facility was built, and seven wells were drilled into Badami formation sands and put on production.
First oil into the Badami Sales Oil Pipeline commenced on Aug. 24, 1998.
The Badami facilities were designed to provide process and export capabilities for an oil production rate of 35,000 barrels per day, in addition to processing 22.5 million standard cubic feet per day of produced gas. Expected peak oil production from the field was 30,000 bpd; however, actual production peaked at 18,000 bpd before declining to 1,400 bpd.
The reservoir at Badami was compartmentalized, making it difficult to develop in the usual manner. BPXA had to frequently suspend operations to let reservoir pressure recharge.
BPXA shut-in the field in 2003.
Production resumed in 2005 when oil prices increased. In 2007, BPXA shut-in the field again.
BPXA transferred working interest ownership in the Badami leases to Savant (67.5%) and ASRC Exploration, or AEX, (32.5%) in 2010.
Savant took over operatorship of Badami starting in 2011, and production resumed.
In 2011 BPXA sold Badami to Savant, with AEX as a partner.
In 2021, AEX sold its remaining interest in Badami to Savant. As a result, Savant owns almost 100% of the working interest in the Badami leases. The only exception is Red Wolf Exploration, which holds a 10% working interest in two segments below a vertical depth of 11,375 ft in ADL 367006 and 367011 while Savant retains the remaining 90% working interest in those segments/depths and retains 100% above those depths. These segments are outside of the Badami Sands PA and bordering the PA to the northwest.
There are no overriding royalty interests burdening the seven leases.
On Aug. 13, 2021, Apollo purchased the common stock held by HPS Investment Partners becoming Glacier's sole owner, and Apollo formally changed its name to MidCap Financial Investment Corp. on Aug. 12, 2022.
The Badami reservoir had been challenging to develop and had historically shown very steep declines. Increases in production were observed following optimization events such as adding perforations, gas lift installations and the addition of the Killian sands well B1-07 in 2018.
These events were followed by periods of very steep annual declines. However, the overall field decline through this period had been stable, although it had been very hard to slow the decline rates. If not for the B1-07 well, Badami may have been at the end of field life earlier.
Even with B1-07 coming online, and subsequent gas lifting of the well, field decline remained at earlier historic rates of around 15-20%.
Shutting in the B1-07 well was a critical event because it reduced Badami oil production to around 500 bpd.
The well was brought back online in May; its performance is being closely monitored by Savant.
Three royalty modification scenarios Under Alaska statutes, royalty modification is allowed under three potential scenarios:
1. New production: AS 38.05.180(j)(1)(A) provides for modification of royalty, "to allow for production from an oil or gas field or pool" that has not previously produced oil or gas for sale.
2. Existing production nearing the end of field life: AS 38.05.180(j)(1)(B) provides for modification of royalty, "to prolong the economic life of an oil or gas field or pool as per barrel or barrel equivalent costs increase or as the price of oil or gas decreases, and the increase or decrease is sufficient to make future production no longer economically feasible."
3. Shut-in production: AS 38.05.180(j)(1)(C) provides for modification of royalty, "to reestablish production of shut-in oil or gas that would not otherwise be economically feasible."
Savant was seeking modification of royalty under AS 38.05.180(j)(1)(B), since Badami was nearing the end of field life.
Four of the seven Badami leases (ADL 367006, ADL 367011, ADL 375093, and ADL 375094) have a 12.5% royalty rate,
ADL 365533 has a royalty rate of 16.667%.
ADL 365535 has a royalty rate of 16.67% and ADL 377011 has a royalty rate of 16.66667%.
Sections 2.2, 4.2, 6.2 and 7.2 of leases ADL 367006, ADL 377011, ADL 367011 and ADL 365533 respectively have a blended royalty rate of 14.585%.
Sliding scale royalty In his decision Boyle said that per AS 38.05.180(j)(2), Savant "showed that the reduction of the royalty rate is in the best interests of the State based on extension of field life, and the potential indirect benefits of Savant's continued operation of Badami."
However, he said, the mechanism for the reduction of the royalty rate proposed by Savant was not acceptable to DNR: "Under AS 38.05.180(j)(3), royalty modification must be based on a sliding scale that accounts for changes in the price of oil and/or gas, and which may also consider other factors."
While a modification mechanism may be based in part on production levels, a modification mechanism based solely on daily production is not allowed under the statute, Boyle said.
The royalty modification approved by DNR seeks to rectify this shortcoming and conform to the requirements of AS 38.05.180(j)(3).
"DNR will grant royalty modification on a more restrictive basis, based on a sliding scale incorporating both oil price and production. DNR's granting of royalty modification is effective as of the date stated in the Final Best Interest Finding, through December 31, 2030," Boyle wrote.
"For every month, DNR will calculate the monthly revenue as the product of the monthly production of oil and the royalty value of such oil at Badami calculated for the corresponding production month. If the monthly revenue is greater than or equal to the monthly threshold for that month based on the annual schedule - then the royalty rates remain at their original values. If the monthly revenue is less than the monthly threshold for that month - then the royalty rates in that month will be reduced so that the sum of the monthly revenue and the benefit to Savant resulting from the reduction of the royalty obligation amount ("adjusted monthly revenue") will equal the monthly threshold for said month," he wrote.
The sliding scale royalty reduction will not result in a royalty rate less than 3%, Boyle wrote in his decision.
| 