Caelus Energy announced Tuesday that it is sitting on 6 billion barrels of oil on the western North Slope, a prospect CEO Jim Musselman said he expects will continue to grow.

The prospect is Smith Bay, a remote inlet of state-owned water more than 100 miles west of current Slope infrastructure.

Musselman and the rest of the Dallas-based independent’s leadership team acknowledge development will not be easy, but if seen through to fruition it could produce up to 200,000 barrels per day.

“It’s of size and scale that we can bring it on, such that it will have an impact on the (Trans-Alaska Pipeline System) going forward, which to me is what everybody in this state ought to be focusing on — how do we keep the pipeline up and full and running,” Musselman said in an interview with the Journal, at the company’s Anchorage office.

“Obviously Smith Bay’s important to us but I think it’s hugely important for the state of Alaska.”

While Caelus appears to have made a huge find, it also comes with a huge cost. The company is estimating it will need between $8 billion and $10 billion to fully develop the field with up to 400 wells on four drill pads.

The exorbitant cost comes mostly from the need to barge and stage all the equipment necessary for the winter work season, Musselman’s son and Caelus Vice President of Business Development Matt Musselman said.

Caelus drilled two near shore exploration wells late last winter and spent the spring and summer evaluating the results. The company did not have time to flow test the wells, which were drilled in 90 days, but sidewall core samples revealed reservoir-quality rock holding light oil, according to Musselman.

Additionally, Caelus has 3-D seismic data that indicates a “huge submarine fan complex” of 300 square miles of potential reservoir that undoubtedly extends well beyond the area the company has delineated, he said.

Caelus will need to drill a third well to fully define what it has, but timing and state fiscal uncertainty mean that activity will have to wait a year until the winter of 2017-18, Musselman said.

The appraisal well will likely include a 2,000-foot lateral offshoot that will be fracked and flow tested.

“When you’re exploring in the middle of nowhere as we are it’s important for you to get an understanding of how oil in place is there,” he said. “That’s first and foremost and then you start working backwards from that.”

Caelus plans to frack its wells into the shallow Brookian formations at Smith Bay as the company has done at its offshore Oooguruk field and plans to do at its suspended Nuna project as well.

“Part of our thesis is we’re going to take this Brookian play all they way across the North Slope,” Musselman said.

Musselman brought his company to the state in early 2014, when it bought the Alaska assets of Pioneer Natural Resources. The company acquired a 75 percent working interest in its Smith Bay leases early in 2015 from the small Anchorage-based independent NordAq Energy, which still holds a 17.5 percent interest in the prospect leases.

As it stands, Caelus believes it could recover upwards of 40 percent, or roughly 2.4 billion barrels of the 6 billion barrels it has discovered.

However, Musselman projects his company could uncover 10 billion barrels in total once seismic is shot over the rest of its Smith Bay leases. Caelus has modern 3-D seismic data for about two-thirds of Smith Bay.

“Giant fields get bigger with time,” he said.

A large associated natural gas resource could also increase oil recovery if it can be reinjected to pressurize the oil reservoir, as is done at other North Slope fields, Musselman noted.

The two Smith Bay exploration wells cost the company $135 million, Matt Musselman said. But about $90 million of that went into overcoming the logistical nightmare that is a remote North Slope project, he noted.

“The drilling is the cheap and easy part,” Matt Musselman commented.

Bringing Smith Bay online will also require an on-site processing facility and a 125-mile pipeline — either just offshore or across the federally owned National Petroleum Reserve-Alaska — to tie into the Trans-Alaska Pipeline System to the east.

All that means production from Smith Bay should start no less than five years after full-fledged development kicks off, according to Caelus Alaska Operations Vice President Pat Foley.

“It’s doable, we just got to get the pot right in regards to the state,” the senior Musselman said.

He added that more than anything the company needs fiscal certainty from the state to see Smith Bay through.

Fiscal certainty in Alaska will always mean a stable oil tax regime, which for small companies has been thrown off the past two years by Gov. Bill Walker’s vetoes to the state’s oil and gas tax credit payments. These days, though, it also means resolving the state’s $3 billion-plus annual budget deficits and thus removing the impetus for drastic fiscal policy shifts.

In a statement from his office, Gov. Bill Walker commended Caelus for its discovery and its commitment to keep working in the state.

“My administration will continue to work with the industry to identify new development opportunities in Alaska’s oil and gas sector, and provide appropriate investment incentives given our current fiscal climate,” Walker said.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.