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Popp bullish on the inlet Kenai Peninsula Borough official sees increasing interest in Cook Inlet exploration; possibility of deep drilling signals $300-$500 million more in capital investment over the next four years Alan Bailey Petroleum News
Dwindling oil reserves in the Cook Inlet oil fields, the Agrium fertilizer plant at Nikiski under threat of closure and uncertainty about the future of the Nikiski LNG plant don’t seem to add up to a bunch of optimism when it comes to the future of Alaska’s Kenai Peninsula. But, with natural gas exploration gaining momentum and several companies ready to move forward with new exploration and development plans, Bill Popp, oil, gas and mining liaison for Kenai Peninsula Borough, sees light on the Kenai horizon.
And the oil and gas industry is critically important to the Peninsula, Popp told a World Trade Center Alaska audience on Aug. 16.
“About one out of five of our payroll dollars on the Kenai Peninsula … can be attributed to the hydrocarbon industry,” Popp said. “… These are important jobs that make an important contribution to our economy and we’d like to keep that industry healthy and growing.”
But, after peaking around 1964-65 following the discovery of the Swanson River oil field, investment in oil exploration in the Cook Inlet basin tailed off — the discovery of the giant Prudhoe Bay oil field shifted attention to the North Slope.
“There was that expectation of that second wave of drilling — it never happened — everyone went north to the North Slope, elephant hunting,” Popp said.
Peaked at 90 million barrels Oil production peaked at a little more than 90 million barrels in 1972 and had dropped to 7.1 million barrels by 2005, Popp said. Remaining proven reserves are just 90 million barrels, despite substantial in-field development work that has added nearly 37 million barrels to the reserves, he said.
But why is Cook Inlet oil production important?
Popp cited the Tesoro oil refinery at Nikiski on the Kenai Peninsula as a key reason for maintaining the flow of oil from the Cook Inlet basin. That refinery produces substantial amounts of diesel fuel, jet fuel and gasoline for the Alaska market and currently processes about 17,000 barrels per day of crude oil from Cook Inlet. The refinery also uses 25,000 bpd of oil contracted from the Alpine field on the North Slope (transferred to Nikiski from the Valdez Marine Terminal) and 23,000 bpd from Indonesia and Africa.
The oil imported from overseas represents 16 percent of Alaska’s crude oil usage. That percentage hooks Alaska into world oil markets and will increase unless Cook Inlet oil supply levels can be maintained, Popp said.
“This is a growing issue that I think policy makers in the State of Alaska need to be thinking about more as we progress through this decade,” Popp said.
Popp said that the main concerns are the diesel and jet fuel supplies that are so critical to Alaska. In refining these fuels the state actually overproduces gasoline, some of which it then exports. In 2003 the state exported 2.5 million barrels of gasoline, Popp said. But, despite having four oil refineries in the state, the state had to import nearly 3 million barrels of jet fuel and 5.5 million barrels of diesel in that same year.
Other than the Tesoro Nikiski refinery, all Alaska refineries totally depend on North Slope oil supplies, with no economic ability to switch to other crude oil sources, Popp said.
Optimistic about oil and gas But Popp feels optimistic about future exploration and development in Cook Inlet for both oil and gas. He thinks that uncertainty about future oil taxation in Alaska has held companies back. But with the petroleum production tax issue now settled he says we may now see companies start to move forward on their exploration and development plans.
In his communications with companies operating in the Cook Inlet basin he has heard of plans for exploration, upgrades to offshore platforms and improvements to the drilling infrastructure. Some companies may even drill deep below the Tertiary strata that contain all of the known oil and gas reservoirs — oil and gas plays in the Mesozoic strata below the Tertiary remain largely unexplored.
“Several companies have expressed their interest in going deeper down into the Jurassic layers in Cook Inlet basin — pushing the 20,000-foot depth barrier in an aggressive way,” Popp said. “If those companies go forward with what they have told us about, this could be anywhere from $300 million to $500 million worth of capital investment in the Cook Inlet basin over the next four years.”
Popp particularly commented on the commitment that Escopeta Oil and Gas Corp. is making in bringing a jack-up drilling platform to Cook Inlet. Lack of a jack-up rig has been a block on Cook Inlet exploration for a long time.
“This is not a small investment they are making to bring this rig up for a two-year drilling schedule,” Popp said, commenting that the current Gulf of Mexico day rate for a jack-up rig is $117,000, excluding all of the operational costs for the rig.
Escopeta estimates that its offshore acreage in the Cook Inlet contains 1.7 billion barrels of oil and 7.5 trillion cubic feet of natural gas, Popp said.
“Even if they are only a quarter right or even a tenth right these will be significant reserves that are located very close to the industrial complexes and the pipeline infrastructure at Nikiski and in the Cook Inlet basin,” he said.
Upswing in gas exploration Although oil exploration in the Cook Inlet basin has remained in the doldrums since the 1960s, a pending natural gas shortage in Southcentral Alaska has led to a substantial upswing in drilling for gas since the turn of the century. New gas is now coming on line from several fields.
“There’s a lot of investment going on out there right now to meet the issues that we’re now facing with gas supplies,” Popp said.
A substantial excess of stranded gas in the early days of the Cook Inlet oil and gas industry led to low gas prices and the development of the fertilizer and LNG plants at Nikiski. But the supply vs. demand situation is now much closer to a Lower 48 model, with gas prices rising accordingly. Gas production peaked in the mid-1990s. Cook Inlet fields have produced 7 trillion cubic feet of natural gas to date and a little more than 1.6 trillion cubic feet of proven reserves remain, Popp said.
A 2004 U.S. Department of Energy report estimated that there might be as much as 13 trillion to 17 trillion cubic feet of undiscovered natural gas in the Cook Inlet basin. And since 2000 Cook Inlet explorers and producers have generated 353 billion cubic feet of new reserves to offset consumption and slow the decline in supplies. Additional reserves have moved the projected date for a shortfall in gas supplies for power generation and the heating of homes and businesses from an earlier estimate of 2012 to a current estimate of 2014, Popp said.
“That still doesn’t solve the key problem of losing our industrial base, our value-added manufacturing base, which is vital to maintaining any kind of a thought of bringing a North Slope gas pipeline to the Cook Inlet basin,” Popp said. “You have to have buyers at the end of the pipe who will buy sufficient quantities to make the tariffs work.”
And Popp questioned the assumption made by some people that the construction of a pipeline to deliver natural gas to Southcentral would kill exploration for gas in the Cook Inlet basin. Even if the DOE estimate for undiscovered gas is only half correct, there’s 8 trillion cubic feet of gas to be found. At $4 per thousand cubic feet (today’s average price), that amounts to $32 billion worth of gas, as compared with the DOE estimated cost of $5 billion to find the remaining gas in the Cook Inlet, Popp said.
“So there is an economic case to be made that we are going to go out and drill,” Popp said.
And economics — pipeline tariffs and the delivered price of gas — will also determine whether a pipeline is built to deliver North Slope gas into Southcentral Alaska.
“That’s what’s going to drive a spur line or a bullet line to the Cook Inlet area,” Popp said.
He said that buyers would need to bid for pipeline capacity during a North Slope gas line open season, to bring gas to the Cook Inlet area. Will these buyers appear?
“That is the question that has yet to be definitively answered,” Popp said. “There is a lot of work that needs to be done on this before that question can be answered in a definitive way that goes beyond the rhetoric of politics.”
Fertilizer plant The future of Agrium’s Nikiski fertilizer plant remains a major concern. The plant uses dwindling supplies of Cook Inlet natural gas and has been under threat of closure for several years. Agrium has mothballed half of the plant and laid off about one-third of its Nikiski workforce, Popp said.
But Agrium is considering converting the fertilizer plant to use a coal gasification process, rather than natural gas. The company estimates that the plant conversion would cost $1.8 billion to $2 billion, with completion of the new plant slated for 2011 at the earliest. As an additional benefit the plant could co-generate electricity to feed into the Alaska Railbelt power grid.
The coal gasification plant would have to dispose of substantial amounts of carbon dioxide, Popp said. But it might be possible to use that carbon dioxide for enhanced oil recovery in the older Cook Inlet oil fields. Preliminary DOE studies suggest that this use of the carbon dioxide could result in 300 million barrels of additional oil production from existing Cook Inlet fields, Popp said.
“That could have significant impacts on the Cook Inlet basin,” Popp said.
The Chuitna coal project in the huge Beluga coal field on the west side of Cook Inlet could be a source of coal for the Agrium plant. But, regardless of whether the coal gasification plant comes to fruition, rising world coal prices seem to be bringing Chuitna back into play after a hiatus of a couple of decades. PacRim Coal, the Chuitna developer, is moving forward in it preparations for construction, Popp said. The supplemental environmental impact statement process should be completed by 2007, with construction perhaps starting in 2008, Popp said.
Workforce shortage With so many potential Alaska resource development projects on the horizon, Popp admitted to some bemusement at concerns about work going out of state.
“It causes me to smile every time I hear people talking about ‘we’re not going to have those out-of-staters take our jobs when all these projects come on line’,” he said. “… The big issue right now is — where are we going to come up with all the workers to do all these projects — I think that’s the bigger question.”
Popp compared Alaska with Canada where, he said, a shortage of workers is creating havoc with the planning of major oil and gas projects. And in Alaska there are many workers approaching retirement age, but young workers are not available to replace them, he said.
Popp said that the Kenai Peninsula Borough has been working hard to encourage training infrastructure expansion at facilities such as the Mining and Petroleum Training Service in Soldotna, at the Alaska Vocational Training Center in Seward and the Pacific Rim Institute for Safety and Management in Kenai.
But “it’s just a drop in the bucket for what we’re going to need to prepare for these kinds of project scenarios in the coming decades,” Popp said.
The Kenai Peninsula Borough and the University of Alaska have assembled a timeline of prospective Alaska projects and the estimated numbers of workers that those projects would require.
“We overlaid those in different timelines, based on what we knew in the media and what we could find out from the companies,” Popp said.
In the 2009 to 2015 timeframe you’ve got a tremendous number of projects potentially coming on line, he said. Those projects could require upwards of 44,000 workers.
“If that’s only one-tenth right that’s a lot of workers. … If we’re half right, look out,” Popp said.
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