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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2009

Vol. 14, No. 8 Week of February 22, 2009

Where from here on Cook Inlet gas?

Some exploration interest but activity likely to be down in 2009; land access and gas storage will be important in the future

Alan Bailey

Petroleum News

Following an active year for Cook Inlet drilling in 2008, things look likely to be quieter in 2009, Kevin Banks, director of Alaska’s Division of Oil and Gas told the Senate Resources Committee on Feb. 9. The gas producers will probably do some development drilling to ensure that gas production levels can meet commitments in supply contracts, Banks said in response to a question about the impact of the economic recession on Cook Inlet activity.

“Beyond that, 2009 may be a tough year for us in the Cook Inlet,” he said.

In 2008 there were three exploration seismic programs, searching for new reserves in existing Cook Inlet units, Banks said. And the 15 Cook Inlet wells drilled in 2008 were primarily gas wells, aimed at increasing gas deliverability and production from existing fields.

But Banks is concerned whether oil and gas producers will be motivated to pursue further exploration this year.

“Cook Inlet represents for a lot of producers a fairly marginal development prospect, particularly those who are looking at worldwide opportunities,” he said.

Some interest

But there is at least some exploration interest out there.

“I met with folks last week who are putting together some plays near Swanson River and also in the West MacArthur area. … If they can find investors we may see some more applications for more exploration,” Banks said.

The division has been assertive in chasing existing leaseholders to drill in their leases. In December, frustrated by delays in planned drilling, the division placed the Corsair unit in default and refused to extend work commitments for the neighboring Kitchen unit — both units lie offshore in the Cook Inlet. In January the division proposed combining these two units with the nearby proposed Northern Lights unit, to encourage the various unit and lease owners to bring a jack-up rig to the Cook Inlet to commence offshore drilling operations.

In the past week the owners of the Kitchen unit indicated that they are finding investors for exploration in the unit and the owners “are quite excited that things can happen,” Banks said. But the question that division is wrestling with is whether sticking with the current unit owners will prove to be a quicker road to development than “pulling the plug and trying something different,” he said.

Areawide lease sales

Looking further ahead, the state has issued its final best interest finding for a second 10-year cycle of areawide oil and gas lease sales in the Cook Inlet.

“This is something of a milestone for us,” Banks said. “The areawide lease sale schedule is in its 10th year.”

The challenges going forward will be environmental, he said. There is always the possibility of litigation over the best interest finding and the impact of the listing of the Cook Inlet beluga whales under the Endangered Species Act is unknown.

“I hope that we are creating the appropriate mitigation measures in our leases to take care of that,” Banks said.

But one key to encouraging more exploration in the Cook Inlet basin is the opening of more land for oil and gas leasing, especially through coordination of land access with the federal government, Banks said.

“I think that it’s essential now that we start thinking about ways in which access to more land can be achieved and your help in that matter would certainly be welcomed,” Banks told the committee. “… We want to see access to federal lands where we think there is oil and gas potential.”

The division has also been discussing the possibility of issuing some new gas storage leases. It hopes that new gas storage will be operated for the benefit of third parties, rather than as part of an individual gas producer’s operations. That would open up the possibility of a gas utility purchasing gas from producers during the summer months, to store that gas to help meet winter demand.

Constrained by size

The Cook Inlet gas market is constrained by its size, Banks said. There’s an annual requirement for about 48 billion cubic feet of gas for the LNG plant, with much of the remainder of Cook Inlet gas production going to the local electric and gas utilities. Gas supply arrangements tend to be tied up in medium or long term contracts between producers and gas users.

However, potential new gas producers recognize that the market is somewhat in flux because of various current issues relating to the need for some new utility gas supply contracts, Banks said. So there is the possibility that a new investor could enter the market at the margins of the gas supply. Selling gas to the Kenai Peninsula LNG plant may be another possibility for a new producer.

There is also the future possibility of a gas spur line connecting Southcentral Alaska and the Cook Inlet with a main gas line from the North Slope to Calgary and the Lower 48. Rather than marking the demise of gas production in Cook Inlet, Banks thinks that, by connecting Cook Inlet to the rest of North America, a spur line could provide a new incentive for finding and developing more Cook Inlet gas — if producers had access to a pipeline like that they’d see an opportunity to produce from new fields at optimum rates rather than having to defer production to service Cook Inlet supply contracts, he said.

But new gas storage that increases the flexibility of the Cook Inlet gas market is the most obvious place to look to encourage new Cook Inlet gas development in the near term, Banks said.






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