On August 16, Santos Ltd. and its joint venture partner Repsol have made a final investment decision to proceed with the US$2.6 billion Phase 1 of their Pikka development project on Alaska’s North Slope. The first oil is expected in 2026 with a daily crude of 80,000 barrels per day.

Santos, an oil and gas producer based in Adelaide, South Australia, said Phase 1 has 2P recoverable reserves of 397 million gross barrels. A recent Wood Mackenzie report for the entire Pikka unit puts that figure at 768 million barrels.

Santos projects a Pikka Phase 1 IRR of approximately 19% at a long-term oil price below $60 and a life cycle equilibrium oil price of approximately $40 per barrel, including carbon pricing.

In a parallel August 16 press release, Repsol said the full Phase 1 development “will consist of 45 wells to be drilled from a single well pad, using state-of-the-art technology to reduce the environmental footprint, with associated midstream facilities, including a production facility, operations center, seawater treatment plant and pipelines.

The Pikka unit is onshore, near existing infrastructure, and on state, non-federal leases.

Six months ago, Santos was talking about selling a 15% stake in the Pikka project.

On May 22, the Australian Business Review’s DataRoom column reported that major North American oil and gas producers “appear to be lining up in the sales process for a stake” in Pikka.

DataRoom editor Bridget Carter wrote, “In the process of the competition advised by Moelis, major US energy heavyweights are considered” such as ConocoPhillips, ExxonMobil and Chevron.

Approaching the development stage in 2019, Oil Search Ltd., ahead of its December 2021 sale to Santos, said it was interested in selling a 15% stake in Pikka and surrounding acreage to a third party. It is common on the North Slope to have at least three partners on major oil and gas projects.

At that time, Repsol had not expressed any interest in selling part of its stake, but had reached an agreement with Oil Search to leave the Australian company in control of the operation of Pikka, whatever the percentages. of property. Later, Repsol said it would be open to a sale of 15% of its stake in Pikka, which sits west of the central north slope.

But in Repsol’s recent press release, he said nothing about selling his interests; a follow-up call to a company media representative yielded no information on the matter.

It turned out that Santos CEO Kevin Gallagher told participants of a half-year earnings conference call on Aug. 16 that although he was “unable to agree on a stock sale at this Today, with strong supply contracts and the project in excellent readiness, we believe the time is right to monetize this exciting opportunity and we are happy to move it forward.

Similar to what the company had done with its Barossa gas project, “we can still sell before first production. We don’t need to wait and delay our investment decision and risk loss of value for Santos shareholders,” Gallagher said.

Later in the Q&A portion of the conference call, when asked to “clarify Santos’ sales aspirations” going forward and whether the process was “now complete for now,” Gallagher said that Santos wasn’t waiting.

“We don’t think we should wait to develop this project for other people who have been interested in the project – and a good interest in the project. But as I said in my speech, we don’t have managed to get us to agree on anything on time so far. And we know others see the value in Pikka, but we think it’s a project that will become more valuable over time. And we think now is the time to expand it. We’ve talked a lot about how the world has changed over the past six months. And like I said, we don’t need to wait and sell before we can move forward, but we are always open to selling during the development phase, just like we did on the Barossa project, where we sold to JERA after FID.

Regarding how the world has changed in the past six months since a previous conference call from Santos, Gallagher said energy security is now a major issue due to the invasion of Ukraine.

Gallagher bullish on ConocoPhillips

Asked about the potential to work with ConocoPhillips on the Pikka development “now that Willow seems to be…moving forward with the environmental aspects of this project that may be approved,” Gallagher replied “absolutely.”

“I think Conoco is an excellent operator. I worked with them for many years, I always insisted on the fact that they have a strong safety culture, a strong operational culture. We will want to work with Conoco…hopefully it can be beneficial for both parties. And indeed they will benefit from our oil in this pipeline, as you know, it will reduce the tariff for everyone because it is volume based.

“We look forward to working with Conoco and other operators in the region. I was there recently, and you’re right, if Willow goes ahead, there will be a lot of activity and the most activity for a while,” Gallagher said.

Praises Alaska Employees

Operator Oil Search (Alaska), a Santos company, has a 51% working interest in the Pikka unit; Repsol has a 49% stake (see Repsol article in this issue of Petroleum News).

Santos is focused on local sourcing and local employment on the project, with 98% of current employees living in Alaska. Phase 1 of the project is expected to create over 500 jobs and construction of the project will create approximately 2,600 jobs.

Addressing the work Santos has undertaken since taking over Oil Search’s assets in Alaska, including the Pikka unit and the Alaska office in Anchorage, Gallagher said the “in country” team in Alaska led the work under the supervision of Santos in Australia.

“Investments have gone down a bit. But I would say the main work that we’ve been doing over the last kind of a year or six months…has really been contracting and getting the right contracts…preparing to do the project and reducing the risk of the project . I think a lot of the work was excellent.

“But again, it was the country team that led most of this work. … I spent some time there with some of our team recently, I met with all the local stakeholders, the indigenous stakeholders, the governor, the senators, the federal senators and we have a lot of support for the project.

Gallagher described the Oil Search (Alaska) team as “world class. … I was very impressed with the team that Bruce (Dingeman) put together in the country with very… experienced people in Alaska who make up that team. And I’m sure they’re very happy today about this announcement, because I know they’ve been anxious for some time now, but a great team in the country, a great asset, a low risk asset – like I said, it’s primarily a drilling project. Now, the majority of the civil works have been completed.

Gallagher also noted that “we spent six months securing them and linking them to the center of the business so that we have that governance across all operations and linking the in-country team to the corporate here in Australia”.

Low Emissions Project

“Pikka Phase 1 represents one of the lowest cost and lowest emissions intensity new oil projects without reductions in the region,” Santos said in its Aug. 16 press release.

FID’s take on Pikka Phase 1 is “consistent with Santos’ goal of reaching net zero (scope 1 and 2, equity share) by 2040.”

The company said it is committed to delivering a net zero project (scopes 1 and 2, equity participation) and has entered into memorandums of understanding with Alaska Native companies to carry out carbon offset projects , including a strategic alliance with ASRC Energy Services, a wholly owned subsidiary of Arctic Slope Regional Corp., or ASRC, on leading technology development for carbon solutions in the Arctic.

Santos also noted in its press release that the development of Pikka is also supported by other key stakeholders, including the State of Alaska, the North Slope Borough and owner company Kuukpik Corp.

One such supporter is U.S. Senator Dan Sullivan, R-Alaska, who issued the following statement welcoming Pikka de Santos’ announcement: “It’s exciting to see this project, which has been ongoing since I was serving with the Alaska Department of Natural Resources Commissioner, finally coming to fruition,” he said Aug. 16. “Today’s announcement is great news for energy security, national security and economic and community development, including thousands of jobs for Alaskans, in our state where we have the highest environmental standards in the world.”

Contract strategy

Finally, when asked about the procurement strategy and the risks for Alaska, Gallagher said, “One of the things I would say is that on all of our projects, I did a review there a few months into our procurement strategies, looking at the countries that a lot of our contracts were with, and it was really in response to the invasion of Ukraine I was trying to understand what risks we had in terms of manufacturing or manufacturing in Ukraine – you would be surprised how much comes from that part of the world or neighboring countries where gas could be cut off to those countries and our supply chain be impacted.

“So we looked at that. We looked at China and Chinese exposure for contracts and other parts of Asia. One of the things that makes me very comfortable about Alaska is that 89% of the spending…is in North America. … There are very few contracts outside the United States … There is no Russian content.

“About 55% or so of the cost of this project would be fixed rate. And the remaining 45% is mostly labor costs. … So I think we’re including close to 10% contingency on this project.

“It’s a relatively low-risk project because we don’t have any of these huge plants, like an LNG plant or offshore vessel components for the project. It’s now really…a drilling project with a kit of processing, making it a relatively low-risk project, so it’s more about the number of days it takes to drill wells than the rates,” Gallagher said.

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