Providing coverage of Alaska and northern Canada's oil and gas industry
January 2007

Vol. 12, No. 2 Week of January 14, 2007

Forest selling Alaska assets

Reducing debt after Houston Exploration buy, focus on onshore Lower 48 properties

Alan Bailey

Petroleum News

Forest Oil Corp.’s November announcement that it was spinning off its Alaska assets as a separate subsidiary triggered speculation that the company was planning to sell off those assets. That speculation proved correct on Jan. 7 when the company announced its $1.6 billion takeover of Houston Exploration Co. Forest intends to divest its Alaska entity to reduce pro forma debt, the company said as part of the takeover announcement. (see related story on page 13 of this issue.)

“In order to reduce our leverage and to further narrow our geographic focus, we will seek to sell our Alaskan entity in 2007,” said Craig Clark, Forest’s president and chief executive officer. In a Jan. 8 teleconference Clark reviewed a post-takeover exploration and development strategy focused on a suite of lease properties in Texas, Oklahoma and the Rocky Mountains; Alaska was conspicuous by its absence.

Forest says that it hopes to reduce its debt by $500 million to $600 million by the end of 2007 by the “sale of Alaska and other assets and free cash flow.”

“Alaska will be the major part of that,” Forest Chief Financial Officer David Keyte said during the Jan. 8 teleconference.

The timing of the “for sale” sign going up in Alaska would appear to depend on progress with the Houston Exploration takeover — Forest hopes that the sale will be completed in the second quarter of 2007.

“Our goal is to reduce our long term debt from initial estimates of $1.9 billion to $1.3 billion by year end, but a lot of this depends on timing and when we begin to manage the (restructured) business,” Keyte said.

Forcenergy purchase in 2000

Forest entered the Alaska oil and gas business in 2000 with its purchase of Forcenergy Inc. That purchase included the Redoubt Shoal and West McArthur River oil fields and a number of oil and gas prospects in the Cook Inlet basin. After valiant efforts to bring the difficult Redoubt Shoal field on line the company has been producing oil from that field through the Osprey offshore platform.

Forest is also operator for the Kustatan and West Foreland fields, and has a 53.2 percent working interest in the Chevron-operated Trading Bay field. The company owns a 20.79 percent interest in Aurora Gas’s Three Mile Creek gas field. All of these fields lie on the west side of the upper Cook Inlet.

In addition to Redoubt Shoal, some acreage acquired from Forcenergy lay offshore in the central upper Cook Inlet.

On the east side of the inlet, near Anchor Point in the southern Kenai Peninsula, Forest has a 12.5 percent interest in the offshore Cosmopolitan prospect, where operator Pioneer Natural Resources is evaluating possible oil and gas production.

Forest also holds a small working interest in the Prudhoe Bay field on the North Slope.

The company inherited from Forcenergy an interest in a state exploration license in the Copper River Valley. Part of that license area was subsequently converted into an oil and gas lease, in which Forest holds a 50 percent interest. Operator Rutter & Wilbanks has been testing for gas in a well drilled near Glennallen in that lease.

Growth opportunities

Despite disappointing production results from the Redoubt Shoal field Forest was continuing to seek growth opportunities in Alaska, Leonard Gurule the company’s senior vice president for Alaska operations, told Petroleum News in October 2003. In fact, the company had just acquired two exploration licenses in the Susitna basin.

In November 2004 Forest purchased 17 tracts on the west side of Cook Inlet west of Point MacKenzie in an Alaska Mental Health Trust lease sale. The company also picked up some tracts in the State of Alaska’s Cook Inlet areawide lease sale in May 2005.

In February 2005 Forest announced that it had two successful gas wells onshore in the Cook Inlet area of Alaska, the West Foreland No. 2 and the Aurora Gas-operated Three Mile Creek Unit No. 1.

“These wells are the first of our new onshore gas focus in the Cook Inlet area,” Clark said. “We enjoy a large acreage position surrounding these discoveries so we have a lot of running room. The Cook Inlet acreage is near existing infrastructure, so the time and cost it takes to hook up to sales is minimal.”

And in 2005 the company drilled the Middle Lake unit 1A re-entry well in one of its Susitna basin license areas. That well was completed and suspended in 2006.

In a March 2006 analysts’ conference Clark confirmed a strategy of expanding Forest’s Alaska onshore natural gas production. Clark said that his company sees Cook Inlet onshore natural gas as one of its “up and comer” areas where there is current production, but where further exploration is needed. Alaska’s Susitna Valley fits within the company’s pure exploration areas, termed “flyers,” Clark said.

Gurule said that a comprehensive study of geologic information from existing wells and from seismic data had resulted in Forest making substantial changes to its Cook Inlet lease position, with a policy of only holding onshore acreage with leads and prospects.

“When we started 18 months ago we had an onshore acreage position that was about 30,000 acres,” Gurule said. “Today we have an onshore acreage position that’s 101,000 (acres) — 96 percent of that’s undeveloped.”

That’s a turnover in acreage of about 98 percent, he said.

“We basically got rid of everything we had and acquired almost all new land onshore,” Gurule said.

Offshore interests

But Forest still holds some offshore Cook Inlet acreage. In addition to acreage acquired with the purchase of Forcenergy in 2000, Forest made the highest per-acre bid at a state Cook Inlet oil and gas lease sale in May 2006, bidding $45.51 an acre, a total of $116,505.60, for a tract at North Middle Ground Shoal.

And Forest applied to Alaska’s Division of Oil and Gas to form a unit at its offshore Corsair prospect. Corsair lies on the same anticline as ConocoPhillips’ North Kenai gas field, the known oil pool in Renaissance Alaska’s Northern Lights prospect and Escopeta’s Kitchen prospect.

In its Corsair unit application Forest said it had “identified large seismic amplitude anomalies located in the center of the Upper Cook Inlet approximately 12 miles southwest of the North Cook Inlet field.” The prospect occurs in a feature some 2.5 miles wide and nine miles long that “lies on structural trend with the North Cook Inlet field.”

In 2003 Forest said that pre-drill analysis indicated Corsair could contain 137 million barrels of oil, 79 million barrels in the Tyonek formation and 58 million barrels in the Hemlock formation, along with as much as 480 billion cubic feet of natural gas.

The exploration of offshore prospects such a Corsair would require a jack-up rig, something Escopeta and Forest propose in their unit exploration plans. Danny Davis, president of Escopeta, has been working to bring a jack-up rig to Cook Inlet.

But plans for Corsair and other Forest prospects are now set to pass to some other company.

Although, with the ink barely dry on Forest’s Jan. 9 announcement of its plans for Alaska divestiture, it’s too early to do more than speculate on who might be interested in purchasing Forest’s Alaska portfolio. There are some obvious contenders with existing positions in the Cook Inlet area. Perhaps XTO, with its strategy of buying and developing known hydrocarbon pools, might be interested in the more mature field positions. Or a company like Renaissance Resources Alaska might see an opportunity to build on its Alaska interests. And then Chevron seems set on expanding its Cook Inlet operations.

That all remains to be seen.

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