Steady progress in the southern Kenai

Cook Inlet basin: Armstrong’s headway at North Fork unit improves economics of three other prospects in area north of Homer

By Eric Lidji

For Petroleum News

Just a few years ago, oil and gas development on Alaska’s southern Kenai Peninsula was a chicken and egg situation.

Now it’s poised to become a hatchery.

When Armstrong Cook Inlet brings its North Fork oil and gas project into production early next year, it could be the push needed to bring several other prospects in the region into development. (See related Cook Inlet story on page 1 about Apache Corp., whose entry into the Southcentral Alaska basin could represent a sea change in the region.)

The southern Kenai Peninsula is one of the more underdeveloped corners of the Cook Inlet basin, which supplies the natural gas that heats and powers more than half the state’s population.

Despite oil and gas exploration in the region in the 1960s, development never took off like it did on the west side of the Cook Inlet or the northern half of the Kenai Peninsula. The past 15 years, though, have brought renewed interest to the southern Kenai, but development remained stalled until Denver-based Armstrong Oil and Gas acquired leases in 2007.

Armstrong drilled a well in the summer of 2008 and the results were good enough for the company to sign a natural gas supply agreement with Enstar Natural Gas late last year.

Now Armstrong is pressing ahead on development.

In mid-August, the company moved a rig to the North Fork Unit No. 41-35 pad to clean and flow test the well that Standard Oil of California drilled in 1965. That well Armstrong plans to make its first producer in the unit.

“That well has been suspended for the last 40 years,” Alan Dennis, with the Division of Oil and Gas, told the Anchorage Mayor Dan Sullivan’s Energy Task Force on Aug. 18.

Once the work on the old well is done, Armstrong plans to move the rig back to the main pad at North Fork to drill two development wells into the Beluga gas sands. One of those wells, though, would first test an oil target in the deeper Hemlock formation and then be plugged back to produce gas from the Beluga. “The first well is probably going to be the oil and the second well will turn out to be the third test of the Beluga (gas sands),” Dennis said.

Armstrong also plans to build an in-field gathering line to connect the old and new well pads and is nearing construction on a dual pipeline to bring its natural gas to market.

The North Fork Pipeline would run 7.4 miles from the unit to just outside of Anchor Point, where it would connect to a planned extension of the Kenai Kachemak Pipeline, or KKPL.

Armstrong anticipates that pipeline will be in service by March 2011, Dennis said.

A better option for Cosmo

Although Cosmopolitan is primarily an oil prospect, there is also some natural gas in the field. Dennis wouldn’t quantify the gas potential, but said, “There’s a substantial amount of gas.”

Pennzoil discovered the prospect in 1967 and ConocoPhillips formed the Cosmopolitan unit in 2001, but neither company pursued development.

Pioneer acquired the prospect in 2006 and in 2007 followed up on a well and sidetrack drilled by ConocoPhillips.

Pioneer has proposed a development plan that would bring Cosmopolitan into production by 2014, but one of the biggest obstacles is figuring out how to market the oil and gas it produces at the unit.

One idea is to truck crude oil to the Tesoro refinery 75 miles north in Kenai, but that option would leave the gas stranded unless Pioneer builds a pipeline.

The KKPL extension could keep Pioneer from having to build a major pipeline.

“Once they have a place to put their gas, this project could happen,” Dennis said.

Pioneer is currently delineating the offshore prospect from onshore, but Dennis noted that if other companies successfully bring a jack-up rig to the Cook Inlet, then the company might be able drill offshore and tie the field back to the onshore pad.

West Eagle and Nikolaevsk

Dennis noted that newcomer Buccaneer Alaska out of Australia is talking about exploring the Beluga and Hemlock formations at its West Eagle prospect east of Nikolaevsk.

Buccaneer plans to shoot 2-D seismic this fall in preparation for an exploration well in late 2011. That could lead to a 12-well development program.

The company believes it could see production rates of 30 mmcf per day or gas and 2,000 barrel per day of oil.

North Fork development could also give a boost to the Nikolaevsk unit to the north.

Chevron operates Nikolaevsk, but is currently appealing a February decision by the State of Alaska’s Division of Oil and Gas to reject a third plan of development for the unit.

In filings, Chevron blamed the slow pace of development on the lack of infrastructure in the region, but previously told the DOG that progress at the North Fork unit “may stimulate construction of a pipeline route from Happy Valley that could be tied to Red, which may in turn enhance the farm-out opportunities at Nikolaevsk.” Chevron preferred that route to the one Armstrong ultimately chose because it passed closer to Nikolaevsk.

Nikolaevsk probably won’t see movement this year, while the appeals process plays out.

Positive signs for Homer?

Using a small legislative grant, Homer is building a pressure reduction station and a small stretch of pipeline this year, and plans to search for money to fund the rest of the pipeline.

Homer is in the Enstar service area, but with supplies tight in the Cook Inlet, it could take a sizeable find nearby to get backing for expanding the grid to include another city.

Editor’s note: Word on the street is Chevron has minor oil and gas assets in the Cook Inlet basin up for sale, but is working to put all its inlet properties on the market after the first of the year. One Petroleum News source indicated Apache Corp. has approached Chevron about buying all of its Cook Inlet assets. None of this aforementioned information was confirmed by Chevron or Apache.