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January 2008

Vol. 13, No. 4 Week of January 27, 2008

Aurora Gas optimistic about the future

Cook Inlet independent continues to seek a new investor; Scott Pfoff says coalbed methane development is a future possibility

Alan Bailey

Petroleum News

Aurora Gas remains optimistic about the future of its Alaska Cook Inlet operations, company President Scott Pfoff told Petroleum News Jan. 22. As reported by Petroleum News Jan. 20 Aurora Gas has placed its Alaska oil and gas assets for sale with Meagher Oil & Properties, a Denver-based acquisition and divestiture firm.

Pfoff characterized the sale offering as the latest stage in Aurora Gas’s drive to recapitalize the company — early in 2007 Kaiser Francis Oil Co., 90 percent owner of Aurora Gas, decided not to invest any further money in Cook Inlet exploration. Kaiser Francis is looking to divest and, if the price is right, the remaining owners would probably also divest, he said.

“What we’re doing is a corporate transaction.” Pfoff said. “… We’re looking to sell the company corporately.”

Negotiations in 2007

Pfoff said that Aurora Gas had negotiated with “four or five companies pretty seriously” during the summer of 2007, in an attempt to find an owner to replace Kaiser Francis. Those negotiations reached the stage of a letter of intent with one company, but the deal with that company was never closed, Pfoff said. And so, Aurora Gas has now commissioned Meagher Oil & Properties to find a purchaser.

“We had already selected Meagher to be the company to handle this transaction for us, should we be unable to consummate a deal on our own,” Pfoff said. “So they were already teed up and ready to go.”

Aurora Gas decided to wait until the New Year before launching the new sale effort, he said.

And the sale could take several forms, said Ed Jones, Aurora Gas’s executive vice president engineering-operations.

“It could be shares of the company, partial shares of the company, corporate sale, assets with management, assets without management,” Jones said.

But, since Aurora Gas has an experienced staff and an existing organization, both Pfoff and Jones think that there would be significant advantage in a company taking over the complete operation, rather than just the leases.

“We’ve got what we feel is a great management team and staff in place,” Pfoff said. “We’ve been operating for six years. We’ve learned a lot along the way.”

Coalbed methane

Jones also said that coalbed methane production has become a distinct possibility on Aurora Gas’s leases — all current Aurora Gas production comes from conventional gas fields involving sandstone reservoirs.

“We find coals in all of the wells that we drill on the west side of the Cook Inlet,” Jones said. “I think we have some of the more likely candidates for coalbed methane in the area where we have activity.”

“There is a number of factors that have caused coalbed methane to move up the list of interests to us,” Pfoff said.

A trend towards unbundling utility gas contracts, to separately price base load gas from gas used to meet volatile or swinging peak demand, is a prime factor, Pfoff said.

“Coalbed methane (production) is much better suited for base load than it is for swinging,” Pfoff said. “In fact it’s not conducive to swinging at all.”

There is also upward pressure on gas prices in the Cook Inlet region. And improved coalbed methane completion technologies are achieving higher flow rates, while enabling production from deeper coals, Pfoff said. In addition, well spacing doesn’t now have to be as close as it used to be.

And Aurora Gas’s leases lie far from population centers, where coalbed methane production has proved controversial in the past, Pfoff said. The leases also lie in an area where Aurora Gas already has infrastructure, such as gathering lines and production facilities. The company also has a process for permitting water disposal, a key issue associated with coalbed methane production, Pfoff said.

A very cursory look at the possible coalbed methane resource suggests something in the region of 8 billion cubic feet of gas in place per square mile section, Jones said.

“The reserve potential, quite frankly, is tremendous,” Pfoff said. “… We’ve got everything aligned in our favor, we feel, geologically and infrastructure-wise, and commercially. It’s the best place to try coalbed methane in the Cook Inlet (region) we’re convinced.”

Five fields

Aurora Gas currently operates five conventional gas fields on the west side of the Cook Inlet, with a total production of 8 million cubic feet per day.

But Aurora Gas’s company-owned drilling rig has lain idle since October 2006, in part because of reluctance by Kaiser Francis to invest more money in the Cook Inlet, but also because of a lawsuit by Enstar Natural Gas following Aurora Gas’ suspension of gas supplies to Enstar. Aurora Gas said that it suspended supplies because the gas prices under the Enstar contract were “far below what is economic.” Enstar has sued for breach of contract, although Aurora Gas has said that it had the contractual right to the suspension.

Pfoff said that the Enstar litigation is particularly delaying development drilling.

“We do have some … proved, undeveloped locations that need to be drilled,” Pfoff said. “… Since a lot of those … are on acreage that’s dedicated to the (Enstar) contract, until we get that issue resolved it doesn’t make any sense to go drill new locations and then be obligated to sell the gas for basically a $2 netback price.”

Swift Energy

In March 2006 Aurora Gas and Houston-based independent, Swift Energy, announced a joint venture for Aurora Gas’s Cook Inlet acreage. In 2006 Swift participated with Aurora Gas in the drilling of a dry, wildcat oil well in the Endeavour prospect in the southern Kenai Peninsula. Under the terms of the joint venture, Swift acquired a working interest in much of Aurora Gas’s acreage as a result of participation in the Endeavour well.

Subsequent to the Endeavour drilling, Swift became preoccupied with an acquisition in Louisiana and did not participate in further Cook Inlet drilling.

Swift Energy is still evaluating opportunities in the Cook Inlet as part of the company’s complete portfolio of exploration investment possibilities, Scott Espenshade, director of investor relations for Swift Energy, told Petroleum News Jan. 24.

“We have not made an assessment. … No decisions have been made at this point,” Espenshade said.

Meantime, Aurora Gas continues to seek new investment in its Cook Inlet leases.

“We have a lot to offer,” Pfoff said. “A lot of the hard work has already been done with the pipelines and infrastructure that we’ve put in place. We just need somebody who wants to turn the drill bit to the right and bring more gas on.”






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