Escopeta inching toward Kitchen Lights

State puts ‘super unit’ out for public comment; plan of exploration requires 4 exploration wells through 2013, appeals dismissed

Eric Lidji

Petroleum News

An independent exploration company could get more time to drill in the Cook Inlet basin.

Under a proposal advanced by the state on March 3, state oil and gas officials are letting Escopeta Oil move ahead on a plan to expand the boundaries of its offshore unit.

The expansion would cover two additional prospects in the region.

The proposed Kitchen Lights unit would cover the existing Kitchen and Corsair units, and the Northern Lights prospect, making it the largest unit in the Cook Inlet basin.

The move follows months of negotiation between the state and the company about whether and how to extend the terms of dozens of expired leases in the region.

The proposal is currently out for public comment through May 6. The state is required to make a final decision about the unit within 60 days after the comment period closes.

If the state approves the expansion, it would mean Escopeta successfully cleared one hurdle toward exploring in the region, but now faces another in the immediate future.

For more than a year, the three offshore prospects have been part of an ongoing debate between state land managers and several independent oil companies about whether to extend lease deadlines for companies that have failed to meet work commitments.

Drilling required in 2010

Escopeta recently filed a five-year exploration plan with the state setting out a timetable for drilling four exploration wells across the unit between next year and the end of 2013.

The exploration plan requires Escopeta to explore each of the three prospects making up the unit. The company must drill at least one well a year through 2013 or lose the unit. The three prospects sit in shallow waters south of the village of Tyonek.

Escopeta plans to drill 16,000-foot wells, deep enough to pass through two layers of gas-bearing sand and two deeper layers of oil-bearing sand. Early well locations are designed to explore the oil potential of the area, but Escopeta said it “may substitute an alternate location to develop the natural gas reserves” in the unit “due to the need for natural gas.”

Cook Inlet natural gas production has been declining for years, leading many to project shortfalls within five years without new prospects coming online or an alternate supply.

The first well would be in one of three possible locations: East Kitchen No. 1 on ADL 389926, Kitchen No. 1 on ADL 389924 or Kitchen No. 2 on ADL 289917.

The second well will be in the Corsair prospect in 2011. The third well will be in the Northern Lights prospect in 2012. The fourth well will return to Kitchen in 2013.

Difficult road up ahead

Exploration in the area around Kitchen Lights has been hampered in the past by logistics.

To manage the shallow waters in the area, offshore exploration in the upper Cook Inlet requires a specialty rig, either a drilling ship, or a mobile unit known as a “jack-up rig.”

Because many of these rigs are stationed in the Gulf of Mexico, and because the rig is too large to pass through the Panama Canal, bringing a jack-up to Alaska requires a ship not only capable of lifting the heavy equipment, but also of lugging it around South America.

The voyage, in turn, creates another challenge. Because the available ships capable of the trip are mostly foreign-built and operated, Escopeta will need a waiver of the federal Jones Act, which limits domestic ports to ships built, owned and manned domestically.

In the past, companies with leases in the upper Cook Inlet, including Escopeta, have been unable to arrange all the various pieces of this puzzle to the satisfaction of the state.

But in recent years, they have come close. In 2006, Escopeta secured a jack-up and became the first independent to get a Jones Act waiver, but trouble getting the rig to Alaska prevented the company from drilling.

Last year, Pacific Energy Resources secured a jack-up and a “heavy-lift vessel,” but the state didn’t sign off on the plan because the contract contained conditions for approval.

Escopeta hopes the additional time, which follows a drop in oil prices, will allow it to renegotiate lower terms for contracts on both the jack-up rig and the heavy-lift vessel.

The inability of these companies to arrange a program nearly led the state to terminate all the units, revoke all the leases and include the acreage in a future lease sale.

Under the exploration plan filed earlier this year, Escopeta must have all the pieces of and permits for a drilling program in place by June 30, 2010, or risk losing the leases and unit.

Could resolve two appeals

Last year, Pacific Energy appealed a state decision not to expand the Corsair unit to include four surrounding leases, as well as the state’s decision not to accept the heavy lift vessel contract, thereby putting the Corsair unit into default. Should the state ultimately approve Kitchen Lights, Pacific Energy said it “intends to dismiss its appeal.”

Pacific Energy owned Corsair before farming it out to Escopeta earlier this year.

Pacific Energy recently filed for Chapter 11 bankruptcy protection.

Combining the prospects into one unit acknowledges the similar geology in the region.

The three prospects sit along one anticline running 30 miles from northeast to southwest.

Escopeta believes Kitchen could be a “missing giant,” a major oil reservoir previously undiscovered in the Cook Inlet. Only exploration will prove or disprove that theory.

Between 1962 and 1994, companies drilled six wells in the Kitchen Lights region. All but one of the exploration wells primarily targeted oil prospects in the area. The other well targeted the shallower gas plays. All six wells found oil and gas in varying amounts.