The managing director of 88 Energy, David Wall depicts the transformational progress that he’s helped the company experience since 2014 and delineates the positive milestones that Project Icewine has achieved in recent months. He also highlights the challenges of operating in the harsh landscapes of Alaska, while elaborating on how government incentives, strategic partnerships, and operational excellence have best positioned 88 Energy for success in the Central North Slope. Having only taken over as managing director in April 2014, you’ve already guided 88 Energy through some massive changes. Can you start off by elaborating on a few of the most pivotal decisions you’ve made, and how they’ve impacted the company’s performance thus far?
In its previous incarnation, Tangiers Petroleum, the company had been quite embattled – having had three different boards over the span of three years. At the time of my appointment, it was on the cusp of drilling a high risk, high impact well called TAO-1 off the shore of Morocco, where there had been a lot of industry interest over the proceeding four to five years. Upon joining the company, together with two other board members, chairman Michael Evans and non-executive director Dr. Stephen Staley, our main focus was to raise the money that the company needed to pay its share of the TAO-1 well costs. We were able to raise the appropriate amount of money and drill the well – but it didn’t yield any commercial results, leaving us in a rather unenviable position.
The company essentially became a shell with no asset and no money at the time. The other board members and I were all quite familiar with the situation, considering our involvement with startups over the years. Most of my startup experience was on the financial services side helping small companies find deals, raise money, and also writing research. Leveraging that experience, I was able to bring in a group of investors to revitalize the company – eventually rebranding into 88 Energy.
Initially, we raised enough capital to fulfill our obligations in Morocco, even with cost overruns, while sparing several millions dollars to scope out new opportunities – essentially hoping for success but planning for failure. The prospective deal flow we were evaluating at the time was quite considerable – with main areas of interest being in Africa, the Perth Basin, and the US. With regards to the company’s asset portfolio, what initially led the company to Alaska’s Central North Slope? And why has this area been the ideal place to build up the company’s acreage position?
Through one of my connections from my days in financial services, I was introduced to a key figure in the company’s story – Paul Basinski. During his tenure with ConocoPhillips, Paul was tasked with finding a big liquids-rich shale play. At that point in time, all the US shale plays were composed of gas because multi-stage fracking was in its infancy. As such, he helped pioneer the concept of targeting liquid hydrocarbons that were in a vapor phase – which would flow like a gas when fracked, but turned to liquids when exposed to pressure changes at the surface. After leaving ConocoPhillips, he eventually started his own company called Burgundy Xploration and set his sights on Alaska, a destination with very prolific source rock. Over a couple years he leased 10,000 acres in the Central North Slope and matured the project to a point that elicited outside interests – thus sparking the partnership between Burgundy Xploration and 88 Energy. We actually managed to cut a deal at the early onset of the decline in oil prices, and leased another 90,000 acres shortly thereafter.
Generally speaking, Alaska is comparatively difficult place for drilling, with its remote location and harsh landscape. Fortunately for us, the Alaska government had established incentives to stimulate exploration activity and augment oil flows through the Trans Alaskan Pipeline, which had fallen from a peak of 2.2 mmboed to 500 mboed. Recognizing that any further decline could potentially cause expensive structural damage, the government put in a place a generous rebate program that returned up 85 percent of all exploration costs incurred in any given year. Given the existence of a ready made drilling pad on our acreage, instead of acquiring seismic, we decided to drill first and spud our Icewine #1 well, on October 22, 2015. In anticipation of a potentially extremely competitive bidding round in the future, and taking advantage of the opportunity created by challenging market conditions, we ended up bidding for and winning another 172,000 acres, bringing our total footprint to 272,000 acres in the Central North Slope.
We’ve since taken core in the HRZ shale, our primary target in Alaska, and fortunately, the evaluation results have all been very positive and more or less falling in line or above our initial expectations. Although more work needs to be done on proving up the resource base, we’re now on the cusp of a very substantial unconventional play. Historically speaking, how much activity had already been going on in this area?
Previously, there was an oligopoly in effect with the majors having ownership over Prudhoe Bay, the largest oil field in both the United States and North America, and another multi-billion barrel field called Kuparuk, as well as a couple other satellite fields with a half billion barrels of oil or so. However, most of their activities were focused on the northern part of the slope, with sporadic bouts of exploration in the south, where the source rocks generated the oil for the large fields to the north.
After the incentives were put in place, we have seen an influx of players backed by significant amounts of funding such as Hilcorp and Caelus. There have also been several other Australian juniors entering this space, several of which ultimately floundered by biting off a little more than they could chew and not taking a phased approach..
While we have a substantial acreage position, we’re not on the hook for any large committed expenditures. Strictly based on what the two companies can afford, Paul and I both went forward as a team in the decisions that we’ve made. We’ve pursued a disciplined and staged approach, without accruing any financial obligations. If the market was terrible and we couldn’t raise money, we could do nothing and wait it out. Fortunately, we’ve had sufficient access to capital to move our operations forward. From an investor standpoint, what favorable indications depict this project as such a favorable play?
Icewine #1 was designed for one purpose, and that was to tell us if we were going to fail, and if so, to fail as quickly as possible. As opposed to some of the larger companies that might undertake an extended multi-well drilling program before realizing feasibility, juniors must adopt a more agile mentality in order to limit liabilities and sustain operations—which is what we’ve done.
In line with that “fail fast” philosophy, we’re been on the lookout for three Achilles heels: thermal maturity, permeability, and fraccability. We’ve ticked the box on the first two, and now we’re assessing the rock mechanics to determine how easily we can frack the formations. But, our early indications display many similar characteristics to the Marcellus and Haynesville, which are two very successful shale plays. There’s still an ample amount of work to be done, but we’ve gone a long way in de-risking the play. Would you say the odds of commercial success have significantly improved now?
Prior to the drilling of the well, Paul had conducted four to five years of due diligence. While the standard rates of commercial success are 10 percent, I would say, with Paul’s efforts in the beginning, we started off with 25 percent. In light of our recent milestones, those odds have effectively almost doubled to 40 or 50 percent. What consideration factors ultimately determined 88 Energy’s decision to retain operatorship versus non-operatorship?
To an extent, that’s one of those determinations that boils down to being in the right place at the right time. There are a few different methods of operating in Alaska. Many small companies, given their lack of resources and specialized expertise, will seek out turnkey operators to help develop a play. This arrangement, however, is fraught with risk because they involve an inherent reduction in control – leaving the smaller companies to cope with potential exposure.
We were fortunate to employ an operations manager by the name of Erik Opstad, who was formerly at BP and a co-founder of a company called Savant Alaska. Leveraging his background as a drilling engineer, Erik lead all the operations work in Alaska – completing the last bit of permitting within a tight timeframe and delivering the well within budget, despite mechanical challenges and consequent minor delays. What will the development timeline look like from this point forward for Project Icewine?
We’re about to initiate a seismic acquisition to de-risk any localized faults around the location where we plan to drill our second well – a horizontal well with multi-stage fracture stimulation – and to also delineate any large conventional prospects. There’s still a good amount of conventional prospectivity in the Central North Slope, with Repsol and Armstrong Oil & Gas having discovered possibly the largest onshore conventional field in the North America in over 40 years. But the focus for us still remains on shale.
We’re also looking for a farm in a partner in the second half of 2016 to help finance the substantial amount of costs that the next phase of the project will entail. Considering its unconventional nature, the second well will be circa twice as expensive as the first, which cost USD 17 million. Aside from mitigating funding risk, we expect that the partner will bring in a layer of operational expertise that we currently do not have in-house. Erik’s background has been primarily based in conventional drilling, which has employed a large degree of hydraulic fracking. But, the scale of multi-stage fracking that we’re looking at for Project Icewine will be a change to that already utilized Alaska. So, we’d want to bring in someone with significant experience in developing successful shale plays with fracking in the lower 48. Would it be too early to conceivably predict a date for first oil?
Our target is to have the well permitted by the end of the year, and then from there it really depends on what type of deal we can establish with prospective partners. I’m confident that we’ll be able to execute a deal, despite the current climate, but whether or not it’ll be the deal that we’re ideally looking for is the question. Ultimately, that will depend on the level of competitive interest that we can generate, which we’re currently building up. If all the anticipated pieces fall in place, the second well could be spud in Q1 of 2017 and conceptually acted as the point of first oil. But, full field development will require a lot more planning, with at least five to ten more wells to delineate the play across the acreage position before first oil goes to market. With the oversaturation of supply globally and the downturn in oil prices, will there actually be a market for the company to effectively commercialize its assets from your perspective?
The whole oversaturation of oil is somewhat of a misnomer. OPEC has always had five to six million barrels of spare capacity, but simply chosen not to produce it. The influx of oil from shale plays in the lower 48 have changed the political dynamic such that OPEC’s hand has been forced in maintaining production rates to safeguard market share. Against the background of market fundamentals, the demand curve continues to increase. Even though the shale plays have added an extra layer of consideration, the fact of the matter is conventional fields are in decline. Is there a lot more oil to be unlocked with new technologies? Yes, most likely. But there will always be a place for plays that can be lowest quartile cost or highest quartile performance on wells.
Project Icewine, considering its location in Alaska, probably won’t fit in the former classification. So we’re focusing on entering the highest quartile performance bracket. Obviously, once operations are established and scale achieved, the costs can be brought down significantly. They’ll never be as low as Texas, but it serves as a prime opportunity for an incoming party with deeper pockets, given the potential infrastructure plays and a longer term leg associated with the significant amount of gas that can be monetized in Alaska, which may feed into the proposed Alaska LNG project. Compared to some of your peers in the industry, how is 88 Energy best structured to capitalize on its position and deliver shareholder returns?
The key differentiator for us is that, unlike private companies or majors, we’re the only company that can offer a highly liquid investment with pure play leverage. We’re the only listed junior, on both the ASX and AIM that has exposure in a meaningful way. We’re still at the pointy end of the value chain in terms of proving up this resource. But, if we can continue to de-risk this play, then we’re looking at several billion barrels of recoverable oil potential. Even in bearish scenarios, 50 cents or 10 cents a barrel when multiplied by the resource potential is still several times our market capitalization. So, that leverage still exists for us – leaving us in a relatively good position to attract further investment.
It is an exciting time for us, albeit not easy. We’ve had some luck being in the right place at the right time and other situational factors that are being created by the challenging external environment. Hopefully from here, we can continue to hit our milestones with the team of like-minded, hardworking, and highly motivated people that we’ve managed to assemble. We’ve been able to achieve all the expectations that we initially set for ourselves, so if we continue on that trajectory, along with the support of our investors, then we’ll continue to be rewarded. Against the backdrop of constant volatility and cyclical market fluctuations, what underlying factors have kept you motivated on a day-to-day basis?
I’ve always been interested in this entrepreneurial side of the market, and the oil and gas industry is fast-paced, high-risk, and high-reward. In what is already a challenging industry to begin with, the personal payoff in achieving success is simply unparalleled. Simply put, hard work is this industry is rewarded with better outcomes. But, more specifically, it’s about positioning yourself in a way that effectively capitalizes on any opportunities created by an ever-changing, increasingly dynamic environment. If you’re hiding under a rock because the sky is falling, then you’re not going to be able to see the silver lining.
88E Price at posting:
7.7¢ Sentiment: Buy Disclosure: Held
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