Explorers 2014: Linc sees a ‘clear path’ for Umiat oil development

Australian independent wants to develop the remote field after a successful flow test earlier this year

Eric Lidji

For Petroleum News

In the old days, exploration companies used seismic information, geophysical clues, wildcat wells and a lot of luck to find reservoirs of oil or gas hidden beneath the surface.

Today, companies like Linc Energy Inc. are pursuing energy sources discovered decades ago, but left undeveloped because older technologies prohibited economic development.

The Australian independent is currently pursuing two such projects in Alaska: an effort to synthesize methane from deep coal deposits and an effort to develop the Umiat oil field.

After two seasons actively exploring Umiat, Linc recently completed the first flow test in decades at the Umiat field and believes it has “a clear path” to commercial development.

Wasting no time

The acreage was split between a block near Point MacKenzie along the western bank of Knik Arm and a block at Trading Bay on the west side of Cook Inlet, and included State of Alaska, Cook Inlet Region Inc. and Alaska Mental Health Trust Authority leases.

The acreage allowed Linc to pursue a two-pronged strategy.

The company planned to drill a conventional exploration well on the Point MacKenzie acreage and use the proceeds from any resulting natural gas production to offset the cost of unconventional exploration into promising coal deposits in the Trading Bay region.

By summer, Linc was already preparing a well.

The region was home to early exploration by Union Oil Co. of California, Atlantic Richfield and Pan American Petroleum going back to the 1960s. While those exploration companies found promising coal seams, none found commercial amounts of oil or gas.

GeoPetro never drilled in Alaska, but the independent had built a pad and an access road for a proposed Frontier Spirit No. 1 well in the Point MacKenzie region. The 8,000-foot well would have tested for conventional gas prospects in the middle and lower Tyonek formations. A nearby Enstar Natural Gas Co. line improved the economics of the project.

After studying existing seismic information, though, Linc drilled the LEA No. 1 well in October on nearby acreage, building a new gravel pad but using existing access roads.

The 6,323-foot well into “basement volcanic rocks” encountered “a number of gas bearing horizons” and “a number of significant coal seams,” the company announced in November. The well collected gas samples from 31 intervals between 1,500 feet and 6,323 feet, all containing “dry natural gas” between 99 and 100 percent purity, which could theoretically be delivered into the nearby Enstar line with little to no processing, the company said in February, after conducting early analysis. The results “confirmed three significant sand formation intervals that appear to be gas charged and which possess apparent permeable values indicating they are good candidates for a flow test,” Linc said.

The actual flow test provided disappointing results, though. After testing the three sandstones, Linc decided the structure was “too tight” to produce without “swabbing” the well with large amounts of formation water. “The conclusion from the testing is that although gas is trapped within the coal, there is not sufficient natural fracturing in the coal to allow for the recovery of commercial quantities of gas,” the company said in May.

Although disappointing, LEA No. 1 encountered a “significant” coal seam that “appears to be highly suitable for Underground Coal Gasification,” according to the company.

While “disappointed” about the results, Linc CEO Peter Bond called exploration “a numbers game,” adding, “the more smart wells you drill the more likely you are going to be successful.”

“Linc Energy has an extraordinary record of getting our exploration targets right the majority of the time,” he added, “and I still think the coal measures we’ve discovered via the LEA No. 1 program will add a lot of value to the company in the longer term.”

Seeking an ‘Angel’

Toward the middle of 2012, Linc asked the state to form the 1,932-acre Angel unit over one state of Alaska lease and one Alaska Mental Health Trust Authority lease located just a quarter-mile south of where the company had drilled the LEA No. 1 well in 2010.

The proposed unit represented only a small portion of the 14,758 acres Linc was leasing in the Point MacKenzie area, but the company pointed to state regulations requiring a unit to cover the minimum area needed to cover a potential hydrocarbon accumulation.

The company proposed a two-year plan of exploration to support its application.

In the first year, Linc would shoot a 2.64-square mile 3-D seismic survey over the proposed unit and a 12.7-linear mile 2-D survey extending east of the unit boundaries.

In the second year, Linc would drill a well to investigate a geologic “feature” of the Pittman Anticline that extends into both the Tyonek and Hemlock formations.

Previous seismic acquisitions, according to the company, showed “strong amplitude anomalies” and “apparent velocity-induced depressions of seismic reflectors over the crest of the feature” that “would be expected in the presence of gas charged sands.”

Calling itself “the only company that has expressed any interest at any time within the past 40 years in developing the acreage within the proposed Angel unit,” Linc said that rejecting the unit application would be “tantamount to condemnation” for the region.

“While other lessees and potential lessees have been unwilling or unable to develop that Angel prospect, Linc is willing to make that commitment,” Linc wrote to the state.

As the sole working interest owner of the leases, Linc worried it might be denied a unit because the state prefers to use unitization as a way to simplify private negotiations. The company said unitization would ease logistics between the two landowners at the unit.

A month later, the majority of the acreage Linc acquired from GeoPetro expired at the end of its primary term - 16 leases near Point MacKenzie and 10 leases in Trading Bay.

The deadline ended plans for any exploration on the Trading Bay acreage, but Linc held out hope it would get the Angel unit and could continue to explore at Point MacKenzie.

Those hopes ended in September, when the state denied the request, saying the proposed exploration plan “does not propose activity that would result in greater economic benefit to the state if leases were unitized than if the activities were conducted on a lease-by-lease basis,” according to the ruling from Division of Oil and Gas Director Bill Barron.

As for the intriguing geologic feature, Barron concluded that, “At this time, Linc Energy has not presented a structural trap that is reasonably defined and delineated, and therefore has not identified a potential hydrocarbon accumulation for the proposed Angel unit.”

The rejection followed a similar decision about the Cohoe unit, which Aurora Gas LLC had proposed previously, and suggested the state was getting stricter about unitization.

Going deep for coal

While coal gasification is a common industrial process on the surface, Linc wanted to pursue “underground coal gasification.” The process involves igniting underground coal deposits and injecting air and water into the seams. The mixture of heat and oxygen converts the carbon in the coal into methane, the primary ingredient in natural gas.

With half of the known coal reserves in the country, Alaska was an intriguing place for a company looking to conduct a UCG pilot project. “Linc Energy has been studying the potential of Alaskan resources for some time and we have been quietly looking for the right opportunity to enter the region,” Bond said in March 2010.

Specifically, Linc envisioned a three-phase program: a single gasifier on a 90-day trial monitored for one year, a panel of three to six gasifiers on a one year trial and finally a working underground coal gasification project combined with surface gas-to-liquids technology to produce some 20,000 barrels per day of various synthetic diesel products.

The company greatly expanded its holdings in February 2011 when the Alaska Mental Health Trust Land Office gave Linc Energy an underground coal gasification exploration license over 181,414 acres of Southcentral and Interior Alaska. The license covered three areas: on the east side of Cook Inlet near Nikiski, on the west side of Cook Inlet near the Beluga Power Plant and in the Interior region around Anderson, Healy and Nenana.

Linc drilled the TYEX01 in late 2011 and the TYEX01X in early 2012 in the Tyonek area, less than three miles from the Beluga Power Station. The 1,450-foot stratigraphic core hole targeted coal seams previously encountered in the nearby Phillips Petroleum North Tyonek State 58848 No. 1 well from 1973 and the nearby Superior Oil Three Mile Creek No. 1 well from 1967. Linc called the results of the core hole “very encouraging.”

Between September 2011 and April 2012, Linc acquired 2-D seismic over its Interior and Cook Inlet underground coal gasification acreage and also called those results “very encouraging.” The company specifically highlighted its seismic acquisition in the Interior “where there is very little previous exploration drilling and very few well logs exist.”

To support future drilling, Linc commissioned a fit-for-purpose rotary-core rig from Buffalo Custom Manufacturing. The dual capabilities of the rig would allow it to “drill at a faster rate and offer greater borehole stability and control than a traditional core rig.”

Linc drilled the KEEX02 core hole on the west side of Cook Inlet in 2012. “A series of unseasonably early, strong winter storms” required “road and facility repairs,” but Linc eventually completed the 1,700-foot hole in December 2012, according to state reports.

While Linc previously discussed plans for several additional wells, it did not drill any core holes in 2013. Instead the company said it has been studying development schemes and expected to reach a commercial agreement to sell synthesis gas sometime this year.

Success at Umiat

In June 2011, Linc picked up a controlling interest in the Umiat oil field by acquiring Renaissance Alaska LLC for $50 million plus adjustments. The small independent held an 84.5 percent interest in Renaissance Umiat LLC, which held the main leases in the prospect. The deal included 19,358 gross acres over two federal leases and one state lease straddling the Colville River in the western foothills of the Brooks Range Mountains.

The U.S. Navy discovered the Umiat field in 1946, during an exploration campaign in the National Petroleum Reserve-Alaska to find more domestic oil following World War II.

While prodigious, the field remains undeveloped because of its location and its geology.

The Umiat area is far from existing North Slope infrastructure and would likely require a 100-mile road and pipeline bundle, in addition to standalone processing facilities.

Those enormous undertakings made the field uneconomic during periods of lower oil prices, but a state plan to build a road to Umiat and several seasons of exploration from other companies in the region suggested the possibility of finding economies of scale.

(The road to Umiat project has since faced some local opposition, as well as the routine delays expected for any major Arctic project. While Linc would like the state to build the road, the company has said it believes the Umiat field would be economic without it.)

Even under the current high price environment, though, Umiat presents problems. The unusually shallow reservoir is partially embedded in permafrost, which reduces reservoir pressure and also creates challenges for establishing an effective completion method.

The U.S. Navy drilled 11 wells at Umiat between 1945 and 1952. “Behavior of the wells during testing was unpredictable,” U.S. Bureau of Mines petroleum engineer Oren C. Baptist wrote in a 1960 study. “For example, one well was abandoned as a dry hole after all tests failed to recover any oil, yet an offset well, only 200 feet from the dry hole, produced 400 barrels of oil a day.” He hypothesized that drilling mud had thawed the permafrost, allowing water into the formation, which froze the sand and plugged the well.

The U.S. Navy drilled the Seabee No. 1, deeper test well in the region, in 1979, after which the region remained unexplored except for some seismic over the past decade.

Slower than anticipated

Ultimately, Linc had to postpone the entire program for a year because of “logistical and weather issues” including “low snow levels which affected snow road development.”

By August, though, Linc had announced an “aggressive timeline” to bring Umiat into production in five to seven years, estimating peak production of 50,000 barrels per day.

The initial program was similar to the work the company had planned for the previous year, but Linc said its efforts were enhanced by a year of additional technical work, 3-D seismic processing and interpretation, project development and community engagement.

The program called for drilling one disposal well, one or two shallow vertical wells, one deep vertical well and one horizontal well - the first horizontal ever drilled at the field.

Specifically, Linc planned to drill the Umiat DS No. 1 disposal well first, followed by the Umiat No. 16 and Umiat No. 16H well, a vertical and horizontal pair into the same interval to compare effects of the two drilling and completion strategies on the reservoir.

After drilling the side-by-side wells, Linc would move its rig eastward to drill Umiat No. 23, which would target natural gas in the deeper horizons below the Lower Grandstand.

While many companies hope to find gas to fuel operations, Linc planned to inject cold gas into the Upper and Lower Grandstand to maintain reservoir pressure and temperature.

After testing and potential producing the deeper gas found from the Lower Grandstand, Linc planned to plug the Umiat No. 23 well back to the oil sands for another flow test.

While those four wells formed the core of the program, Linc also permitted the Umiat No. 18 and Umiat No. 19 wells, and said it might drill “one or both” with enough time.

Deferred again

A period of light snowfall early in the season combined with extreme cold snaps kept Linc from starting the Umiat No. 18 well until March 2013, which made a four-to-five well program impossible before the thawing tundra would end the exploration season.

The delay forced Linc to defer much of its program.

The revised plan called for finishing Umiat No. 18 and drilling Umiat No. 23H, which the company said would meet its “key objectives” for the season: providing a side-by-side comparison of vertical and horizontal techniques and searching for a deep gas supply.

Umiat No. 18 collected 300 feet of core and encountered 100 feet of net oil pay in the Lower Grandstand, but Linc postponed a flow test because of mechanical problems.

“An apparent blockage formed in the perforation tunnels during the early stages of the campaign,” the company said at the time, adding later that it had unsuccessfully “employed multiple techniques to clean the perforations such as methanol, solvents, and surfactants to remove any ice or other debris in an attempt to re-establish flow.”

After attempts to clear the blockage were unsuccessful, Linc suspended operations for the season rather than start on the Umiat No. 23H and risk stranded its rig at the drilling pad.

Instead, Linc cold stacked the Kuukpik No. 5 rig at the permanent Seabee drilling pad, which would give it a head start on 2014 drilling and avoid more weather-related delays.

Even with the second consecutive set back, Bond said he remained “very confident that we will be able to unlock the vast potential that exists at Umiat. We will utilize the considerable lessons we have learned by undertaking drilling in the permafrost this year and, combined with the additional time available next winter due to the rig being stacked on location, to complete the appraisal of the potential of Umiat,” Bond said.

To avoid thawing permafrost, Linc used a chilled mineral oil based mud system for drilling and a “progressive cavity pump” for its flow test “in order to prevent heat in the borehole from establishing a ‘thaw bubble’ in the permafrost and potentially destabilizing the well bore and surface facilities,” said Linc President of Oil and Gas Operation Scott Broussard. “We were also careful to make sure that the pump was below the perforated zone in order to make sure that heat was not introduced at the perforated zone,” he added.

Even so, Linc said it intended to use an open-hole completion technique on future wells, as the U.S. Navy did on its original wells at the field. By drilling without casing or lining, an open-hole technique allows fluids from a reservoir to flow directly into a well bore.

Finally flow testing

Over the summer, Linc analyzed the Umiat No. 18 samples, which it described as “dripping oil.” The samples indicated “outstanding rock properties” for a lighter oil reservoir, including 16-18 percent porosity, air permeability of 70-270 millidarcies, and “friable” (soft) sandstones “preferred for optimal oil flow,” according to the company.

The results convinced Linc that the Lower grandstand was “completely saturated with hydrocarbons,” the company said in a statement. Eager to complete a horizontal well, the company cancelled the Umiat No. 18 flow test. Flowing oil from horizontal wells could potentially “prove” some of the “probable” reserves at the field, according to Bond.

While optimistic, Linc backed away from its concrete timeline. The company had previously said it intended to bring Umiat online by late 2017, but by October 2013 was saying it “plans to aggressively develop this field once commerciality is determined.”

As winter approached, Linc permitted two addition well locations - Umiat No. 24H and Umiat No. 25 - primarily to have some flexibility as the exploration season progressed.

In February, Linc drilled the Umiat No. 23H well to target depth of 4,100 feet. A subsequent flow test produced a sustained rate of 250 barrels of oil per day - or 650 barrels total during four flow tests conducted over a seven-day period at the field, according to the company. The well flowed at a peak rate of 800 bpd, Linc said. With a gas drive installed, the company believes the well would produce as much as 2,000 bpd.

On-site analysis suggested that the well produced light, sweet 38.5-degree API oil with no water, but Linc said that it intended to perform more in-depth laboratory analyses.

“I’d read stories of how the U.S. Navy was known to put the Umiat crude oil straight from the well head into their trucks and drill rigs,” Bond, who was on site for the flow test, said in a March 31 statement. “And after seeing and experiencing the oil for myself I can see why they would do this, as the Umiat oil looks like and has the consistency of diesel fuel, just fantastic quality oil that did not change throughout the flow test.”

In addition to the successful flow test, the Umiat No. 23H well proved-up the proposed completion method, according to Linc. “We have now proved that the oil flows easily from the Umiat reservoir with very good permeability and that the drilling process of utilizing horizontal wells with slotted liners with ESP down well pumps as per our commercial design has been a success,” Bond said. “And with this success and the knowledge gained from last year’s drilling program, Linc Energy now has clear a path for the commercial development of the billion barrel (original oil in place) Umiat field.”

With the season now completed, Linc said it is moving forward on environmental studies, permitting and engineering for proposed surface facilities and finalizing the best routes for an Umiat pipeline and road. The company recently said it “is also evaluating the advantages of introducing an industry partner to assist us in the future development.”