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Small California E&P Makes Big Play in Alaska Shale

San Diego, CA-based Royale Energy Inc., a publicly held exploration and production (E&P) independent with about 15 MMcf/d of gas production, mostly in Northern California, was the biggest bidder for Alaska North Slope shale oil plays offered last month in a state lease sale.

The lease sale was viewed by some as a disappointment -- considering the need to make up for less-than-optimal supplies available for the Trans-Alaska Pipeline System (TAPS). Alaska's Division of Oil and Gas within the Department of Natural Resources reported that it sold 178 tracts across 334,969 acres of the North Slope for $14.1 million (see Daily GPI, Dec. 9, 2011). Another 78 offshore tracts in Alaska's Beaufort Sea totaling 281,095 acres also were sold for $6.8 million in a separate offering.

Royale came away with 60 tracts, totaling more than 100,000 acres and collectively representing $2.7 million in bids that are now being finalized. The next highest number of bids came from ConocoPhillips Alaska Inc., which won 34 of the tracts for $2.6 million.

For Royale, which sold all of its oil positions in the Monterey Shale in California in 2009, the North Slope is a much less costly way to re-enter the U.S. shale boom, according to Co-CEO Stephen Hosmer, one of three founding family members. The family controls close to 29% of the 26-year-old company. In terms of acreage, this is the biggest bid Royale has made, Hosmer told NGI's Shale Daily Thursday.

"It is by far the largest potential we have ever encountered, [but] it is not the largest cost we have ever spent," said Hosmer. He said the company has filed a registration statement with the Securities and Exchange Commission committing to spend up to a $100 million to explore the Alaskan tracts' potential. "Since 2009, when we sold our shale oil interests, we have been looking to get back in, and this was just a perfect entry point for us. We have the full capacity to be able to handle the properties."

Why Alaska? One major reason was Royale's current exploration and development vice president, Mohamed Abdel-Rahman, who has more than 30 years experience with some of the world's largest petroleum companies. He's also spent time working on the North Slope.

Noting that the company still holds 20,000 exploration acres in Utah, Hosmer said Royale has experience in remote areas with extreme weather conditions. "Of course, by comparison, our past experience would be like drilling in Central Park [in New York City], compared to Alaska," he said.

"Our plan is to move this forward as quickly as possible, so we're looking at doing our first drilling either very late this year or early 2013, and we have always used the model of having a partner in the projects we drill." He described the would-be partners as "strategic relationships" as opposed to financing sources.

"We will have some level of participation with others, but our history has always been that we are the controlling operator and the participants are always along for a [nonoperating interest] ride. This [Alaska leasehold] is clearly a substantial project, and requires some very specialized technical help, so we may end up having a significant major independent or larger partner to offer that technical expertise we want to bring to bear."

Royale particularly needs to find technical expertise in hydraulic fracturing (fracking) design, he said. The company is in good enough shape to finance the Alaskan venture, said Hosmer. Royale also does not "flip" properties, selling off tracts to monetize parts of its assets. Hosmer said the company sees itself as an E&P that holds reserves and develops them. "We're certainly not looking at this just to be a broker in the deal."

The shale boom in the Lower 48 states definitely has been a catalyst, he said. "Economically, we have to ask what our advantage would be [in the Lower 48] that we could bring to bear? Certainly in places like the Bakken or the Eagle Ford, we don't have any specific advantages over anyone else. Alaska is different in that regard."

Royale has "technical competence" in Alaska because of Rahman, "who worked up in the area, knows the shale and has done some very definitive work on biomarkers for determining what the source was for the Prudhoe Bay field. He determined the source rock for Prudhoe Bay through the work he did, and also determined a proprietary concept of the migratory path from the Shublik Shale formation into Prudhoe and the North Slope conventional reservoir."

At this point there are no solid numbers on the probable and potential reserves in the unconventional North Slope formations. However, Hosmer believes that there are a lot of similarities between the Shublik and the Eagle Ford Shale, except the Alaskan formation is about three times as thick and about 600 feet deep. "As far as the brittleness, the ability to frack it and the permeability, we think we are right on par with the type of development in the Eagle Ford," he said.

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