Furie Operating Alaska LLC is scaling back its immediate development program at the Kitchen Lights unit, citing market constraints for natural gas in the Cook Inlet basin.
The independent had initially planned to drill two new development wells at the offshore Cook Inlet unit in 2016 to expand on production from the existing Kitchen Lights Unit No. 3 well, which recently started production.
According to a plan of development Furie filed with state oil and gas officials in early October, “market constraints have limited the volume of gas Furie needs to deliver in 2016, and probably until 2019. As a result, Furie is unlikely to initiate production from more than one additional development well in 2016, and two additional development wells are unwarranted by the market. One additional development well will provide a significant gas reserve that would be immediately available to the market, as needed.”
The current proposal calls for drilling a development well into the Corsair block - one of four exploration blocks at the 83,394-acre unit - by Nov. 30, 2016. The well would target a zone equivalent to the producing zone of KLU No. 3 well, the company said.
In a March 2015 plan of exploration, Furie had said it would complete KLU No. 3 as a development well and drill two additional development wells into the Corsair block by the end of the current drilling season but would postpone completion activities until 2016.
Demand and supply
While the major utilities in the region have contracts with many producers, Hilcorp Alaska LLC is supplying much of the demand for natural gas in the Southcentral region through medium-term contracts. A contract with Enstar Natural Gas Co. expires in early 2018 and a contract with Chugach Electric Association Inc. expires in early 2023.
(The 2019 date referred in the plan of development likely refers to an earlier Chugach contract. As the plan of development was coming together, Chugach negotiated an extension of its Hilcorp contract until 2023, from an earlier timeline of early 2019.)
These contracts have been a doubled-edged sword.
After longstanding concerns about adequate supplies, and conversations about potential short-term imports, utilities were relieved to have several years of breathing room.
Smaller producers worried they would be shut out of the market. When Hilcorp and Enstar sought approval for their contract in mid-2013, Furie, Buccaneer Alaska LLC, Cook Inlet Energy LLC questioned the wisdom of fully satisfying local demand.
“Considering the significance of the local space heating market, Enstar’s decision not to reserve room in its gas portfolio for diversification in natural gas sources until after the first quarter of 2018 may reduce the number of active explorers and producers in Cook Inlet,” former Furie President Damon Kade told the Regulatory Commission of Alaska.
When Enstar had been soliciting interest in supply contracts throughout the region, Furie offered to provide gas by late 2014, about six months after date Enstar was looking to start receiving supplies. At the time, Furie was still early in the process of developing the Kitchen Lights unit. The company said it offered to show Enstar “confidential well flow test data” from existing wells and its plans for the facilities it intended to install in the coming year, Kade wrote. But “when Furie followed up with Enstar just over a month later, Enstar stated that it had already contracted for all of the volumes it required.”
The development timeline later changed and the company recently started production from the field.
Even without a multi-year Enstar contract, Furie has been able to find buyers in the region. The company has a contract with Homer Electric Association Inc. which begins in April and runs through the end of 2018, with options to extend through the end of 2020. The agreement calls for Homer Electric to buy between 4 billion and 6.2 billion cubic feet of natural gas annually starting March 31.
What about exports?
State officials had hoped that the Kenai liquefied natural gas facility would ease market constraints in the Southcentral region by creating an overseas market for small producers.
In September 2013, after ConocoPhillips allowed its federal export license for the facility to expire, acting Natural Resources Commissioner Joe Balash asked the company to apply for a new three-year license. “Without market opportunities for gas discoveries, companies lack the incentive to invest in continued exploration activities,” Balash wrote in a letter to the company. “In addition to the economic challenges this would present for those employed in the Cook Inlet energy industry, a lack of healthy exploration now may lead to supply contractions in the future as existing wells’ production levels decline.”
ConocoPhillips partially obliged, requesting and receive a license to export as much as 40 billion cubic feet over two years. The plan worked, to some degree: some 60 percent of the volumes shipped in six cargoes last year came from other producers, according to ConocoPhillips. The company also shipped six cargoes from the terminal this year.
ConocoPhillips is currently in the process of requesting an extension of its federal LNG export license. The extension would allow the company to export as much as 40 billion cubic feet of natural gas over a two-year period starting Feb. 19, 2016. The license would allow the company to export LNG supplies on behalf of other producers in the region.
Exploration changes
Furie is also requesting a change to its proposed exploration program.
Instead of drilling a new exploration well or commissioning a second development at one of the other exploration blocks within the unit boundaries, as proposed in earlier filings with the state, the company is now proposing to deepen the existing Kitchen Lights Unit No. 4 well to penetrate the Sunfish Channel of the lower Tyonek formation.
Furie started drilling the KLU No. 4 well in the Northern block of the unit in 2013 and completed the well in 2014. The company has said that the well “encountered potential oil and gas reserves,” but has yet to publicly provide more thorough drilling results.
