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This new Alaska oil field could be big – or really big

An Alaska oil explorer with a string of wins claims his latest discovery is the largest in the U.S. since the Prudhoe Bay oil field in 1968, and contains about 3 billion barrels of recoverable oil.

But Bill Armstrong's large corporate partner, Oil Search, is far more cautious, saying the so-called Nanushuk field on the North Slope contains at least 500 million barrels of recoverable oil, though with the potential for much more.

"What we see is there is an awful lot of running room," said Keiran Wulff, the company's executive general manager for exploration and new ventures.

Armstrong and Wulff presented the differing projections Dec. 14 at a meeting with energy analysts posted on Oil Search's website.

Either could be correct, said David Houseknecht, the U.S. Geological Survey's lead geologist for oil and gas resources in Alaska. He has seen seismic data from the region, as well as oil samples from Denver-based Armstrong Oil and Gas.

According to both companies, the 40-mile long, 3-mile-wide Nanushuk discovery includes oil in the Pikka Unit on leased state land. It also includes oil at the Horseshoe exploration well drilled some 15 miles south of Pikka.

Oil Search's cautious, lower-end scenario counts just the oil in Pikka, Wulff said.

The region is about 150 miles southeast of Barrow.

The high end could exceed 3 billion barrels, Houseknecht said. If that is verified by field development and production, that could make it the largest discovery in the U.S. since Prudhoe Bay, originally estimated at 9.6 billion barrels.

Meantime, the low-end scenario of 500 million barrels has a very high probability, said Houseknecht, who calculated the field's potential volumes as part of a recent update of estimated oil in the nearby National Petroleum Reserve-Alaska.

Even at that size, the field would be one of Alaska's largest.

Despite the huge numbers, Houseknecht said that as far as he knows, the companies have not publicly said how much of that oil is economically recoverable. It's not known how much can be produced after the high cost of drilling in Alaska and other factors are calculated.

Additional wells must be drilled before the resource's true potential can be determined, he said.

Wulff said as much in December: "One thing this field needs is more appraising," he said.

A step in that direction should occur soon.

ConocoPhillips plans to drill two exploration wells this winter that could provide additional information about the discovery, Houseknecht said.

Oil Search will see ConocoPhillips' data from exploration drilling as part of an agreement, Wulff said.

He said Oil Search plans to work with ConocoPhillips. Oil Search wants to find ways to maximize oil production from the field at the least cost, and facilities could possibly be shared to make that happen, Wulff said.

Oil Search, traded on the Australian Securities Exchange, with a $12 billion market capitalization, operates oil and gas fields in Papua New Guinea. It announced in October it was purchasing a stake in Armstrong's discoveries. Another Nanushuk investor is Spanish oil giant Repsol.

Oil Search said it was spending $400 million to acquire 25 percent of Pikka, plus buying into the Horseshoe section, and other Armstrong prospects.

Energy consultancy Wood Mackenzie believes Oil Search's Pikka holding — not even counting the other assets – is worth much more.

"They paid $400 million for what we consider $611 million in value," said Alison Wolters, a Wood Mackenzie analyst in Houston, Texas.

Wolters said Oil Search likely paid relatively little for several reasons, including that the project is located in Alaska, where development and operational costs will be high, increasing project risk.

She said Oil Search could see additional value. "There's material upside to the deal," she said.

Signs that the Nanushuk's recoverable oil could be larger than the base estimate at Pikka include ConocoPhillips' aggressive winter exploration plans in the region, part of its busiest North Slope exploration season in 15 years, she said.

"It's a sign the top producer in the region is taking this very seriously," she said.

Armstrong, at the Dec. 14 meeting with analysts, said the sale amount was far less than he wanted.

But he said he knew that Oil Search, with its experience working with indigenous communities in Papua New Guinea, would respect the North Slope's Alaska Native communities. It was also big enough to advance the huge project, much larger than his exploration firm with a dozen employees.

Armstrong is credited with making other discoveries in Alaska since 2000, including Caelus Energy's small Oooguruk field and Italian major Eni's Nikaitchuq field.

He told analysts that Oil Search was sticking to its "really lame" estimate of at least 500 million barrels because it's constrained by what it can say as a publicly listed company.

He said he knows from seismic data, plus multiple wells drilled across large distances and other information, that the field contains 3 billion barrels of oil.

"You'll hear numbers less than that, but that's the truth," he said.

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