RDC’s 23rd Annual Conference Presentations
Jim Weeks, President, Winstar/UltraStar
THANK YOU JACK, AND GOOD AFTERNOON AND THANK YOU LADIES AND GENTLEMEN.
TODAY I WILL TO COVER THREE TOPICS: ACCESS, ACCESS, AND ACCESS. ACCESS TO EXISTING PRODUCTION FACILITIES, ACCESS TO ALASKA CLEAN SEAS SPILL CLEAN UP EQUIPMENT, AND PHYSICAL, YEAR ROUND ACCESS TO OUR LEASES. IF YOU DON’T REMEMBER ANOTHER THING ABOUT THIS TALK, REMEMBER THE WORD ACCESS.
FIRST, A BRIEF RECAP OF WHO WE ARE.
WINSTAR WAS FOUNDED IN 1996 BY JOHN WINTHER OF PETERSBURG, ALASKA AND DALE LINDSEY OF SEWARD.
SEVEN OF THE NINE OWNERS ARE ALASKA RESIDENTS AND CONTROL THE VAST MAJORITY OF THE INTEREST.
AT AREAWIDE LEASE SALES IN 1997 AND 1998, JOHN AND HIS PARTNERS SUCCESSFULLY BID FOR AND WERE AWARDED OVER 12000 ACRES OF LEASES, LOCATED ONSHORE AND NEARSHORE IN STATE WATERS ON THE NORTH SLOPE. IN THE EASTERN PART OF THE SLOPE, WE HAVE A LARGE TRACT ABUTTING THE WESTERN BOUNDARY OF THE BADAMI UNIT, AND A SMALL LEASE OFFSETTING BP’S LIBERTY DEVELOPMENT. AT THE AREAWIDE SALE IN 2001, JOHN, DALE AND I FORMED A COMPANY CALLED ULTRASTAR EXPLORATION, AND ADDED TO OUR POSITION AT BADAMI AND LIBERTY, ACQUIRING NEARLY 11,000. LATE LAST YEAR, WE BOUGHT A BUNCH OF 3-D SEISMIC DATA FROM BP THAT COVERS ABOUT 60% OF ALL OF THE WINSTAR AND ULTRASTAR LEASES IN THE AREA, AND HAVE MADE ARRANGEMENTS WITH A COMPANY CALLED CHROMA ENERGY IN HOUSTON TO ANALYZE THAT DATA, WORK UP LEADS AND DEVELOP PROSPECTS.
WINSTAR ALSO HAS TWO LEASES IN THE CENTRAL PART OF THE SLOPE. ONE, CALLED THE OLIKTOK POINT LEASE IS JUST NORTH OF THE KUPARUK RIVER UNIT AND THE OTHER IS JUST NORTH OF THETIS ISLAND, FROM WHERE EXXON DRILLED A WELL A NUMBER OF YEARS AGO. THIS IS IN THE AREA WHERE PIONEER INTENDS TO DRILL THIS WINTER.
MOST OF OUR EFFORTS HAVE BEEN FOCUSED ON THE OLIKTOK LEASE BECAUSE IT HAS THE HIGHEST POTENTIAL FOR GENERATING POSITIVE CASH FLOW THE SOONEST.
BASED ON 3-D SEISMIC ANALYSIS, WE BELIEVE THERE IS A VERY HIGH CHANCE THAT THE MAIN KUPARUK RESERVOIR EXTENDS ONTO THIS LEASE. WE ALSO BELIEVE THERE IS A FAIR CHANCE THAT ADDITIONAL KUPARUK RESERVES OF CONSIDERABLE SIZE EXIST ACROSS A FAULT, AND WE HAVE LINED UP THE INVESTMENT CAPITAL TO DRILL A WELL INTO THE LEASE TO PROVE OUR BELIEFS.
A SIGNIFICANT ADVANTAGE WE HAVE IS THAT THIS LEASE CAN BE DRILLED FROM KUPARUK DRILLSITE 3R, ABOUT 1 _ MILES SOUTH OF OUR LEASE. THE DRILLSITE IS BIG ENOUGH TO ACCOMMODATE MORE WELLS, AND HAS YEAR ROUND ROAD ACCESS. THIS IS KEY, FOR IT GIVES US LOTS OF FLEXIBILITY IN SCHEDULING THE DRILLING OF OUR WELLS, AS OPPOSED TO THE TIGHT, WINTERTIME ONLY WINDOW CURRENTLY IMPOSED ON EXPLORATION DRILLING OPERATIONS.
SO WHO SHOULD OBJECT TO OUR DRILLING THIS WELL? FOR US TO DRILL AND PRODUCE THE WELL OURSELVES, WE WOULD NEED ACCESS TO ALASKA CLEAN SEAS, THE NORTH SLOPE CLEAN-UP CO-OP, SINCE DRILLSITE 3R IS RIGHT ON THE SANDY SHORES OF SIMPSON LAGOON. BECAUSE OF THE HUGE BARRIERS OF ENTRY, WINSTAR CANNOT BELONG TO ALASKA CLEAN SEAS, AS IT COSTS $500,000 TO JOIN, REQUIRES A $200 MILLION NET WORTH, AND $100 MILLION OF REAL INSURANCE. WE EVEN REQUESTED THE ACS BOARD TO GRANT US ACCESS TO THEIR EQUIPMENT AS A NON-MEMBER, BUT THAT REQUEST WAS DENIED. SO DRILLING THE WELL OURSELVES IS NOT AN OPTION.
THUS, WE ARE COMPELLED TO NEGOTIATE WITH CONOCO/PHILLIPS, OPERATOR OF THE KUPARUK RIVER UNIT, TO DRILL THE WELL FOR US. WHY WOULD THEY AGREE TO THIS—BECAUSE THEY SIGNED THE “CHARTER FOR DEVELOPMENT” THAT RESULTED FROM BP’S PURCHASE OF ARCO? IF IT WERE NOT FOR THIS CHARTER, INDEPENDENTS WOULD NOT BE ABLE TO OPERATE ON THE NORTH SLOPE, AND I WOULDN’T BE HERE TODAY GIVING THIS TALK.
THE CHARTER IS AN AGREEMENT AMONG THE STATE, CONOCO/PHILLIPS’ AND BP. ONE OF ITS PROVISIONS OBLIGATES THOSE TWO COMPANIES TO ALLOW ACCESS TO THEIR PRODUCTION FACILITIES ON “REASONABLE TERMS”, WITH BINDING ARBITRATION AS A BACKSTOP IF TERMS OF ACCESS CANNOT BE AGREED. WITHOUT THESE CONDITIONS, IT IS SAFE TO SAY THAT AGREEMENTS BETWEEN INDEPENDENTS AND MAJORS TO DRILL AND OPE\RATE WOULD NEVER HAPPEN. EVEN AMONG THE MAJORS THEMSELVES, FACILITY SHARING AND ACCESS AGREEMENTS CAN TAKE MORE THAN A DECADE TO NEGOTIATE. (KUPARUK TABASCO STORY).
WHAT THE CHARTER DOES NOT DO IS STIPULATE THE TERMS AND CONDITIONS OF FACILITY ACCESS. BECAUSE CIRCUMSTANCES FOR EACH UNIT AND EACH SATELLITE ARE UNIQUE, TERMS OF ACCESS MUST BE NEGOTIATED ON A SATELLITE BY SATELLITE BASIS.
SINCE OUR OLIKTOK LEASE IS JUST NORTH OF KUPARUK, JOHN WINTHER MADE A PROPOSAL TO ARCO FOR ACCESS TO THE KUPARUK FACILITIES OVER 3 YEARS AGO. THEY NEVER RESPONDED BECAUSE OF THE PENDING MERGER WITH BP. I MADE A VERY SIMILAR PROPOSAL TO THEM SIX MONTHS LATER, AND A FOLLOW-UP WRITTEN PROPOSAL IN DECEMBER OF 2000, NEARLY 2 YEARS AGO. IT WAS REJECTED BECAUSE THEY DIDN’T WANT TO BREAK PRECEDENT OF FURNISHING DRILLING SERVICES TO INDEPENDENT THIRD PARTIES. FINALLY, IN AUGUST OF LAST YEAR, AFTER MONTHS OF ARDUOUS DISCUSSIONS, PHILLIPS AGREED TO TALK ABOUT DRILLING OUR WELL AND GRANTING ACCESS TO THEIR FACILITIES. WE HAVE BEEN NEGOTIATING THAT ACCESS AGREEMENT FOR OVER 1 YEAR NOW, AND ALTHOUGH SOME PROGRESS HAS BEEN MADE, WE ARE NOT YET THERE.
I DO BELIEVE WE WILL EVENTUALLY REACH AN AGREEMENT WITH THEM AND BP, BECAUSE THOSE TWO COMPANIES ARE REQUIRED TO GIVE US ACCESS UNDER THE CHARTER. I’M MORE CONCERNED ABOUT THE OTHER THREE KRU FACILITIES OWNERS, UNOCAL, CHEVRON/TEXACO AND EXXON/MOBIL, WHO ARE NOT PARTIES TO THE CHARTER, BUT WHOSE APPROVAL WE WILL ALSO NEED.
I MENTIONED BEFORE THAT WE HAVE A SUBSTANTIAL LEASEHOLD STAKE IN THE BADAMI/LIBERTY AREA, AND ARE ABOUT TO BEGIN THE ANALYSIS OF THE 3-D SEISMIC. WHEN PROSPECTS ARE DEFINED AND MARKETED, WE WILL PROCEED TO HAVE THEM DRILLED. BADAMI IS IN THE COASTAL ZONE MANAGEMENT AREA, ABOUT 18 MILES EAST OF THE CLOSEST ACCESS ROAD, THAT BEING THE ROAD TO ENDICOTT. BECAUSE OF THE PROXIMITY TO THE BEAUFORT SEA, THE DEC RESTRICTS DRILLING OPERATIONS TO A FEW MONTHS IN WINTER, WHEN THE BEAUFORT IS FROZEN. THIS IS TO REDUCE THE RISK THAT A BLOWOUT COULD POLLUTE OPEN WATER OR PARTIALLY COVERED ICE WATER. THE DRILLING WINDOW COULD POSSIBLY BE EXTENDED IF THERE WERE A SECOND RIG ON STAND-BY TO DRILL A RELIEF WELL IN THE EVENT OF A BLOW-OUT, BUT THIS IS TOO EXPENSIVE.
THE EXISTING OPTIONS FOR MOVING A RIG INTO THE BADAMI AREA ARE:
1) BRING IT OVER AN ICE ROAD THAT CANNOT BE STARTED UNTIL JANUARY OF A GIVEN YEAR. UNDER CURRENT REGULATIONS, DRILLING OPERATIONS MUST CEASE BEFORE BREAKUP, AND THE RIG MOVED OUT OR STACKED IN THE AREA UNTIL IT EITHER RESUMES DRILLING THE NEXT SEASON, OR IS DE-MOBILIZED. THIS PROVIDES FOR A VERY SHORT WINDOW FOR DRILLING OPERATIONS, AND IS VERY EXPENSIVE.
2) BARGE A RIG INTO THE BADAMI DOCK IN THE SUMMER, STACK IT THERE UNTIL FREEZE UP WILL ALLOW FOR DRILLING IN THE WINTER SEASON, THEN STACK IT OR BARGE IT OUT THE NEXT SUMMER. THIS OPTION, AGAIN, IS VERY EXPENSIVE.
3) MOVE A RIG INTO THE AREA BY ROLLAGAN, THE BIG TIRED, LOW PRESSURE VEHICLES THAT CAN SAFELY TRAVEL OVER THE TUNDRA WITHOUT THE PROTECTIVE COVER OF AN ICE ROAD. THIS OPTION PROVIDES MORE FLEXIBILITY FOR MOVING THE RIG, BUT DOESN’T MITIGATE THE WINTER DRILLING RESTRICTIONS. IT IS VERY EXPENSIVE, PLUS THERE ARE ONLY A COUPLE OF RIGS ON THE NORTH SLOPE THAT CAN BE HAULED ON ROLLAGONS.
THE BEST ANSWER TO ACCESS TO THIS AND OTHER REMOTE AREAS ON THE NORTH SLOPE IS A YEAR ROUND GRAVEL ROAD. ROADS TO RESOURCES WOULD GREATLY EXTEND THE DRILLING WINDOW NEAR THE COAST, BECAUSE THE DEC MANDATED BACK-UP RIG COULD THEN BE MOBILIZED FROM DEADHORSE IN A VERY SHORT PERIOD OF TIME.
WE HAVE PROPOSED, AND WILL PURSUE WITH THE NEW ADMINISTRATION, THE CONSTRUCTION OF A PERMANENT ACCESS ROAD FROM ENDICOTT TO BADAMI. SUCH A ROAD WOULD MAKE SMALLER RESERVOIRS MORE FEASIBLE. DRILLING OPERATIONS WOULD BE SAFER, AND EXPLORATION AND DEVELOPMENT COSTS WOULD BE LOWER. THERE IS A RESOURCE TARGET IN THIS AREA OF 800 MILLION BARRELS OF OIL. THE ROAD IS ESTIMATED TO COST BETWEEN $50-60 MILLION. THAT’S LESS THAN 10 CENTS A BARREL!!
SO MY MESSAGE TO GOVERNOR ELECT MURKOWSKI AND HIS NEW TEAM IS THAT IT IS INCREASINGLY IMPORTANT TO THE STATE THAT INDEPENDENTS BECOME MUCH MORE ACTIVE ON THE NORTH SLOPE. THE BIG GUYS HAVE BECOME SO BIG THAT THEIR NEEDS TO REPLACE RESERVES CAUSE THEM TO LOOK ELSEWHERE IN THE WORLD. BUT THERE IS A LOT OF OIL AND GAS YET TO BE DISCOVERED ON THE NORTH SLOPE. GIVEN THE OPPORTUNITY, THE INDEPENDENTS CAN FILL THE VOID. WE CAN REVERSE THE DECLINE, BUT WE NEED ROADS. ROADS THAT LEAD TO SIMPLIFIED AND MORE TIMELY ACCESS TO PRODUCTION FACILITIES, ROADS THAT LEAD TO AFFORDABLE ACCESS TO SPILL CLEAN-UP CAPABILITY AND ROADS TO PHYSICALLY ACCESS OUR LEASES.
LET’S MAKE “ROADS TO RESOURCES” THE BUMPER STICKER OF THIS ADMINISTRATION
THANK YOU FOR YOUR ATTENTION.
