Alaskan North Slope Micro Cap Confirms 1.6BN Barrel Prospective Resource

Alaska’s North Slope basin is brimming with success stories when it comes to oil discoveries.

The North Slope is home to North America's largest oil field, Prudhoe Bay, discovered in 1969 and originally containing over 25 billion barrels of oil.

The region is now undergoing an exploration renaissance as new technology and exploration incentives bring once stranded resources towards commercialisation.

This has led to the two largest conventional oil discoveries onshore North America in over 40 years — ConocoPhillips’ (NYSE:COP) Willow and Oil Search (ASX: OSH)’s Pikka discoveries. And with regional activity ramping up, all signs point to further major discoveries.

This heightened interest in the region was demonstrated at the National Petroleum Reserve-Alaska (NPR-A) Oil and Gas Lease Sale 2019 in December — the most successful sale since 2006 with over US$11 million in bids received for over 1 million acres.

With the region attracting so much interest and exploration dollars, recent discoveries in the area have now exceeded 1 billion barrels of oil, with more than 16Bbbl produced from several oil fields on the slope.

Looking forward, this year will see around US$250 million being spent on drilling in 2020 on Alaska’s North Slope, including eight wells by ConocoPhillips, two wells by Oil Search and Premier Oil/88 Energy’s Charlie-1 well. Regular Next Oil Rush readers would no doubt be familiar with 88 Energy’s growth over recent years from a $5 million microcap stock into the $178 million capped company it is today.

Driving current activity on the North Slope are the privately owned Hilcorp which is acquiring the Prudhoe Bay field from BP for US$5.6 billion (A$8.15 billion), as well as Oil Search’s decision to exercise a $US450 million (A$642 million) option to double its stake in a string of Alaskan exploration leases, including the Nanushuk field in the Pikka Unit, the Horseshoe discovery and other exploration leases.

While those events have all been well publicised, the ASX-listed oil junior we have for you today could be the next making serious headlines.

In news today, the company has announced a 1.6 billion barrels of oil prospective resource from the maiden Independent Prospective Resources Report recently completed by ERC Equipoise.

It has rapidly increased its acreage in the region, delivered the prospective resource, and is seeking a farm-in partner and progressing to exploration.

The company dived in headfirst last April, picking up swathes of highly prospective landholdings on the North Slope. It acquired ~145,000 acres of leases from Elixir Energy (ASX: EXR) when EXR realigned its objectives and divested its Alaskan interests.

The company, then, as a winning bidder in the NPR-A lease auction of this Federal land, increased that package to 195,373 acres.

This newly expanded lease holding — now almost 200,000 acres — over the highly prospective Nanushuk trend on the North Slope of Alaska is located just 35 kilometres south of the ConocoPhillips owned and operated Willow discoveries that are estimated to be between 450–800 million barrels of oil equivalent (MMBOE).

Additionally, directly to the south lies the Umiat oil accumulation which the United States Geological Survey (USGS) estimate to have more than 1.0 billion barrels of oil in place.

The company presents a unique opportunity to get in early as it looks to replicate the success of larger players on the Alaska North Slope.

Given its sub-$10 million market cap, there’s plenty of potential upside on offer for shareholders. Considering the size of its peers on the North Slope, including the US$71.4 billion capped ConocoPhillips, $12 billion Oil Search, $172 million 88 Energy, £972 Premier Oil, as well as some major private operators including HilCorp, today’s company with its nearly 200,000 acres is certainly attractively priced.

With confirmation of the 1.6 billion barrel prospective resource size and the pick-up in exploration activity on the North Slope in the current season, the company is confident of generating strong interest and in securing a farm-out to de-risk its exploration. Having recently completed a successful $2 million capital raise, the company appears funded to do so.

It is also is a position to pursue new low cost (shallow) drilling options in conjunction with local drilling contractors. The company intends to drill two shallow wells (representing ~65% of the prospective resource) to test Multiple stacked Nanushuk objectives and anticipates drilling to commence by as soon as during the northern winter in 2021.

Introducing,

Market capitalisation: $8.4 million

Share Price: $0.012

So why did XCD choose to hunt for oil in Alaska?

Alaska’s North Slope basin has attracted some of the world’s biggest oil and gas majors including ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP), Repsol and Hilcorp, in an area that’s seen multiple new discoveries announced in recent years including the two largest conventional oil discoveries onshore North America in over 40 years.

The first of these is US oil major ConocoPhillips’ (NYSE: COP) Willow discovery, announced in 2017. Willow is a US$5 billion project with potential for 100,000 barrels of oil daily when it commences production in 2024-2025.

Conoco describes Alaska as one of the best exploration prospects in the world and is planning to spend US$15-US$17 billion on its projects in the state over the next 10 years, on both new discoveries and new projects within existing fields on the North Slope.

ConocoPhillips will also test another recent find in the NPR-A, Harpoon, located south-west of the Willow project where three exploration wells are planned this winter. The seismic “signature” at Harpoon is similar to those at Willow and Narwhal, so the company has high hopes.

Oil Search’s (ASX: OSH) Pikka discovery, announced in 2013, is among the biggest onshore discoveries in the US in decades. It too is a US$5 billion project, with potential for at least 120,000 barrels daily.

Oil Search is now exercising a US$450 million (A$642 million) option to double its stake in a string of Alaskan exploration leases, including the Nanushuk field in the Pikka Unit, the Horseshoe discovery and other exploration leases.

Oil Search entered the Alaskan oil investment in late 2017, spending $US400 million to buy minority stakes in two blocks, known as Pikka and Horseshoe, in the Nanushuk oilfield in the North Slope region. The blocks were assumed to hold 500 million barrels of oil, but successful drilling over the past winter led to a resource increase to 728 million barrels.

Production at Pikka is planned to start in 2022 at an initial 30,000-barrels-a-day and rising to about 120,000 barrels a day in 2024.

Not only is the region buzzing with discoveries, but some big deals have been done, particularly in the past year or so, the biggest of the lot being privately-owned Hilcorp’s acquisition of the massive Prudhoe Bay field from BP (LON: BP) for US$5.6 billion (A$8.15 billion).

Last year also saw Premier Oil (LON: PMO) entered the North Slope signing an agreement to farm-in to 88 Energy’s (ASX: 88E) conventional Project Icewine acreage.

XCD on Alaska’s North Slope - Project Peregrine

XCD Energy’s Project Peregrine is one of the world’s newest, highly prospective onshore oil plays. The leases have a five to ten-year exploration period remaining and cover an area of 195,373 acres within the NPR-A. XCD have a 100% Working Interest in the acreage.

Located in the Nanushuk play of the North Slope, the project lies directly to the north of the Umiat oil accumulation that’s estimated to have greater than 1.0 billion barrels of oil in place.

XCD’s leases are also just 35 kilometres south of the 450–800 MMBOE Willow discoveries where ConocoPhillips are drilling five further appraisal wells during this year’s winter drilling season (between now and end of April 2020).

ConocoPhillips also intends to drill up to three exploration wells on its Harpoon Prospect, which lies approximately 15 kilometres to the north-west of XCD’s Harrier Prospect.

XCD interprets the Harpoon Prospect (based on USGS 2D seismic data) to be on the same sequence boundaries as the Harrier Prospect, so any success at Harpoon would likely materially upgrade XCD’s Harrier Prospect. Furthermore, XCD’s Merlin Prospect is interpreted to be on the same sequence boundaries as the Willow Oil Field.

Note XCD lease position on the map below, along with ConocoPhillips’ Willow discovery to the north, its Harpoon Prospect to the north-east, and the existing Umiat discovery directly south of XCD’s project, along with other existing oil fields and discoveries nearby including Prudhoe Bay and Horseshoe-Pika.

In April last year, XCD Energy (ASX:XCD) (then named Entek), acquired a 100% working interest in 13 oil and gas leases comprising 149,590 acres (Project Peregrine) within the National Petroleum Reserve - Alaska from Elixir Energy (ASX:EXR). Along with the assets, now managing director Dougal Ferguson left EXR to lead what would become XCD.

Also with prior international experience with Premier Oil and Hess Corporation, Ferguson is leading an accomplished board and management team at XCD. Non-executive chairman Peter Stickland was the previous MD of Tap Oil (ASX:TAP) and Melbana Energy (ASX:MAY). Additionally, advising the board is regional expert Erik Opstad. Opstad has this year been drilling the Charlie-1 well for 88 Energy and is highly supportive of XCD undertaking low cost drilling at Peregrine.

Why is XCD targeting this location?

The region is host to world class source rocks feeding multiple play types across the region This includes emerging shallow (1,000-1,200 metres) Nanushuk Formation oil discoveries, can be seen at the top of the image below. Deeper Torok oil play also prospective within XCD’s lease area.

A major factor that attracted XCD to this particular area is it being another Nanushuk, as is the case for Willow and Horseshoe-Pika.

Nanushuk is a formation within the greater area, which is stratigraphic traps, as can be seen on the earlier regional map (marked in dark green). The lighter green area is Prudhoe Bay, which is more of a structural arrow arch or a massive dome under the earth which has captured those fields through conventional traps.

The stratigraphic traps are traditionally higher risk, however they work in this area as evidenced by Pikka-Horseshoe for one, as well as Willow. XCD downloaded all the available seismic data over this area and saw similar features near its leases.

Even though the traditional thinking is that the area around the south of where Willow ends is considered gas prone, the fact that Umiat to the south of Pelegrine is an oil field demonstrates that oil is in fact there.

XCD are confident that with improved technologies and improved data, this will be another discovery that has been missed. This is not unusual and was interestingly the case for Amstrong’s discovery of Pikka-Horseshoe.

A lot of wells were drilled through this formation in the past, but because there's no structural trap they were not tested as the focus was on looking for the greater Prudhoe Bay conventional traps deeper down.

No one really went and tested it, and it was only through doing some work of their own that Armstrong took a closer look and tested it properly to determine that oil was there.

In fact, there was half a billion to a billion barrels in that structural alone.

This inspired ConocoPhillips to undertake similar investigations on its blocks and the result is now a 450-800 MMBOE development in Willow.

This is exactly what XCD are trying to do to the south. And while it’s still early days, basin modelling does suggest the Project Peregrine area and Willow on a common oil migration mechanism.

XCD expands position on North Slope

The North Slope oil patch is seeing a surge of interest, not seen for over a decade.

Reflecting this renewed interest, the US Bureau of Land Management’s Alaska State Office held in December its most successful annual lease sale since 2006. It received US$11.2 million in bids for more than one million acres in the North Slope’s National Petroleum Reserve-Alaska (NPR-A) — a significant lift in interest from the prior year’s bids of just US$1.5 million.

XCD Energy’s wholly owned subsidiary, Emerald House LLC, was the high bidder on 45,783 acres over the four leases in the NPRA-A lease sale, while US oil major ConocoPhillips (NYSE: COP) and regional exploration pioneer Bill Armstrong’s North Slope Exploration LLC also managed to secure significant tracts.

These new XCD leases are adjacent and complementary to its existing lease position, with total expanded area under lease now at 195,373 acres and directly adjacent to ConocoPhillips large acreage position.

The new leases capture the balance of the leads that XCD has re-mapped using the reprocessed seismic data. They also contain analogous leads to the large Harpoon prospect being drilled by ConocoPhillips in its 2020 exploration drilling program. ConocoPhillips plans to drill three wells on the Harpoon prospect, two of which will be within 25 kilometres of the northern edge of XCD’s leases as can be seen on the map above.

XCD paid a 20% non-refundable deposit of US$51,992 for the four new leases with the balance of US$207,968 expected to be due in February 2020. XCD is fully funded to complete the lease acquisition following its recent successful $2 million capital raise.

XCD’s managing director, Dougal Ferguson commented specifically on what Armstrong’s activity in the lease sale means.

“The large land position acquired in this year’s NPR-A lease sale by Armstrong is a significant endorsement of our exploration strategy, with Armstrong being the company that unlocked the Nanushuk play at Pika and Horseshoe. Having an explorer of this pedigree now stepping across into the NPR-A in such a big way can only be a positive for XCD.”

Armstrong is known for pioneering the discovery of the region’s Nanushuk formation, which resulted in him selling his holding in the Pikka Unit prospect to Oil Search for US$850 million in 2017.

Independent Prospective Resource

With these additional leases now secured, ERC Equipoise Pte Ltd (ERCE) prepared a maiden Independent Prospective Resources Report integrating the new leases into the volumetric calculations and independent prospective resource report.

ERCE is the largest global independently owned petroleum Reserves and Resources auditor, providing expert consultancy services to the upstream oil and gas industry for over 40 years.

The auditor assessed a prospective resource associated with XCD’s 100% owned Project Peregrine of over 1.6 billion barrels in the mean case:

The data used to compile the independent prospective resource report includes reprocessed 2D seismic data, basin modelling, petrophysical analysis of publicly available wells and historical geological records.

Both the Harrier and Merlin Prospect at Peregrine are targeting the shallow Nanushuk play at around 4,300 ft and 3,400 ft, respectively, and can potentially be drilled using a smaller drilling rig, something that XCD is assessing.

XCD’s initial Merlin Lead is interpreted to be on the same sequence boundary west of the “break in slope” common to both Willow and Merlin.

The Harrier Deep Prospect would require a standard north slope drill rig to reach the Torok target (~10,000 ft) but would intersect both the shallow Nanushuk and the deeper Torok objectives in the same wellbore.

At XCD leases, the Nanushuk is a little bit shallow, but not much more than at Willow so it's a very good analogy to Willow.

Farm-out campaign to begin soon

With the prospective resource complete, XCD can now turn its focus to securing a farm-in partner and as soon as possible and work towards an initial drilling program penciled in for the next northern winter, in 2021.

XCD will soon initiate a farm-out campaign where the options available to farm-in partners will be to pursue either the two well low cost shallow Nanushuk drilling initiative or use a standard north slope drilling rig to pursue all the targets in the Harrier and Merlin Prospects.

XCD’s 100% Working Interest in 195,373 acres over one of the world’s newest, highly prospective onshore oil plays provides significant leverage in securing a partner. The significant size of its prospective resource at 1.6 billion barrels will also draw attention.