Providing coverage of Alaska and northern Canada's oil and gas industry
November 2008

Vol. 13, No. 47 Week of November 23, 2008

The Explorers 2008: Marathon continues to deliver

Company’s program of development drilling keeps the gas flowing from the Cook Inlet

Alan Bailey

Petroleum News

Marathon Oil Corp.’s history in Cook Inlet goes back to 1954 when the company, then known as Ohio Oil Co., started participating in the Southcentral Alaska exploration that led to the establishment of Alaska’s oil and gas industry. Following the discovery of the 2.4 trillion-cubic-foot Kenai gas field on the northwest side of the Kenai Peninsula in 1959, Marathon began supplying natural gas to the city of Anchorage in 1961.

And in 1969 the LNG terminal at Nikiski, owned by Marathon and Phillips Petroleum (now ConocoPhillips), began exporting Cook Inlet LNG to Japan.

Fast forward to the present day, and Marathon continues its primary Alaska business of supplying natural gas from the Cook Inlet region for local use and for export as LNG from Nikiski. The company now produces its gas from the Kenai, Cannery Loop, Kasilof, Ninilchik, Beaver Creek and West Fork gas fields on the Kenai Peninsula, and from the Chevron-operated McArthur River field on the west side of the Cook Inlet.

Field development

Marathon’s Cook Inlet business involves ongoing development and maintenance of the gas fields, to ensure continued gas deliverability, Carri Lockhart, the company’s asset team manager for Alaska, told Petroleum News Sept. 18.

“We continue to spend money on exploitation and development of our existing fields,” Lockhart said. “It’s all about maximizing value back to our stakeholders.”

And those stakeholders include Alaska residents who use Marathon gas, she said.

Marathon’s field development work in 2008 has focused on the Kenai and Ninilchik fields, with the company’s own Glacier Drilling Rig 1 in action drilling new wells.

“By year end we expect to have drilled nine company-operated wells,” Lockhart said.

New field development work in 2008 has resulted in some well pad expansion work, at the Ninilchik field Susan Dionne pad for example, to accommodate both new wells and new production facilities. New facilities include new compression equipment and production facility upgrades, Lockhart said.

Four of the new wells use Marathon’s patented Excape completion technology. The Excape technology greatly improves well completion efficiency in Cook Inlet gas field reservoirs by enabling simultaneous stimulation in multiple production zones, using perforating guns placed outside the well casing. The reservoirs of the Cook Inlet fields are notoriously complex, because of the way that they tend to consist of several layered compartments.

Excape has proved especially valuable in the Kenai field where a single well may penetrate as many as 10 to 15 individual reservoir sands.

Lockhart said that Marathon also does some remedial work, often to restore production from wells that have encountered sand clogging or other downhole problems. And, in the multi-zone Cook Inlet reservoirs, the company also periodically recompletes a well in a new zone to start producing additional pay that was identified during the original drilling of a well.

“You typically produce those higher pressure zones first and as those deplete you move to the lower pressure zones,” Lockhart said.

Ninilchik seismic

As part of the Ninilchik field development program, Marathon is just starting to look at the results of some 3-D seismic that the company acquired in 2007.

“We shot seismic in our north Ninilchik area … in the fall of 2007 and we are just now getting the data back,” Lockhart said.

However, Marathon has also reduced the size of the Kasilof unit, off the Kenai Peninsula coast between the Ninilchik and Kenai fields. Kasilof went online in November 2006. But drilling results at the field indicated that the productive area of the field is smaller than originally thought, Lockhart said.

“It is not uncommon to expect changes to original plans once production and subsurface data is obtained from drilling wells,” she said. “… Such is the case with Kasilof unit. The actual economic hydrocarbon producing area ended up being smaller than once defined from data prior to drilling.”

In terms of drilling activity, Marathon has added another well to its gas storage facility in the Kenai gas field, to improve gas deliverability from the facility, Lockhart said. The storage facility in the Sterling formation pool 6 C1 and C2 sands of the field started operating in May 2006 and has been enabling Marathon to fulfill its contractual obligations to meet Southcentral Alaska utility gas demand swings between summer and winter. The company injects excess gas into the facility during the summer and then retrieves the gas during the winter.

Trying to achieve production swings by shutting in and restarting wells in producing fields would add significant risk to both gas deliverability and ultimate gas recovery, Lockhart said.

LNG terminal

And the Kenai LNG terminal plays a key role in helping Marathon meet peak utility gas demand during especially cold winter days. Local utilities do not have storage facilities to tide them over that peak demand, so terminal owners ConocoPhillips and Marathon occasionally curtail LNG production at the terminal, to divert gas for utility use.

“It’s nice when you have that flexibility, as we do with LNG, so that we can keep our operations fully functional,” Lockhart said. “… I think we all understand … the role the LNG plant plays in the entire system in Alaska.”

The current export license for the LNG terminal expires in 2009 but in June the U.S. Department of Energy approved extension of the license to 2011.

Although Marathon’s prime Cook Inlet focus has been its existing fields, the company has been evaluating a gas prospect called Sunrise in the northern part of the Kenai Peninsula. Also known as East Swanson, the prospect lies in a Cook Inlet Regional Inc. holding inside the Kenai National Wildlife Refuge.

The company has now acquired some 2-D seismic for the prospect and plans to drill there in 2009.

“Sunrise is an exploration prospect that we continue to work and look forward to pursuing that potential,” Lockhart said. “And if it proves out to be a discovery, we could potentially be spudding some time around midyear 2009.”

However, drilling at Sunrise is contingent on final company approval, she said.

Gas pricing

Natural gas pricing in Southcentral Alaska has become a contentious issue, with a series of price increases in recent years. And the Regulatory Commission of Alaska is currently reviewing new contracts that both Marathon and ConocoPhillips have negotiated for the future supply of gas to Enstar Natural Gas Co., the main Southcentral Alaska gas utility.

With the RCA review still in progress, Lockhart declined to comment on Marathon’s new Enstar contract. However, she did emphasize that Marathon’s goal is to ensure that the local utilities obtain gas and that there needs to be a win-win situation for everyone involved.

Recent Southcentral Alaska gas supply contracts have been indexed to gas prices in the Lower 48, on the assumption that returns on new gas exploration and development projects in Cook Inlet need to be able to match projects elsewhere.

“Like any other player we are in a global business and we’re dealing with a global commodity,” Lockhart said. “At the end of the day all of our projects within Marathon have to compete on a global basis. So if you don’t have the returns that are competitive globally, then projects certainly are at risk of not being capitalized.”

And oil and gas projects in Alaska and elsewhere entail considerable risk.

For example, although there is a Cook Inlet exemption provision in the new Alaska’s Clear and Equitable Share or ACES production tax system, Marathon is concerned about fiscal stability, Lockhart said. Fiscal uncertainty is one of the risk factors that need to be mitigated in any oil and gas project, she said.

Risk factors also include the length of time that it takes to bring a project to fruition. And increasingly difficult drilling targets have become an issue.

“It’s not an easy game,” Lockhart said. “We’re targeting much, much more difficult reservoirs than we’ve ever tried to target before and it doesn’t get any easier.”

And in Cook Inlet Marathon also faces the challenge of bringing new wells online in legacy fields with water encroachment and depleting reservoir pressures.

Alaska also has a rigorous regulatory environment, Lockhart said. At the same time various groups constantly challenge oil and gas development.

“Marathon takes a lot of pride in its operations and the fact that we are extremely environmentally sensitive,” she said.

Lockhart also said that Marathon takes great pride in its safety programs — there have been no recordable incidents so far in 2008 in the company’s Alaska production operations, she said.

“I think we have outstanding personnel, both Marathon and contractors, that work in the operation and they continue to drive our culture through safety leadership principles,” Lockhart said. “… It takes passion. And it takes drive. And it takes focus on individual projects and being in the moment. That’s where our people are and I’m very proud to be a part of those operations.”

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