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Vol. 15, No. 7 Week of February 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Big Risk, Bigger Rewards: Alaska’s Cook Inlet basin

Alan Bailey

Petroleum News

Cook Inlet, a major sea inlet between the Kenai Peninsula and the mainland of Southcentral Alaska, lies over part of a deep sedimentary basin that has formed between the Kenai Mountains and the mountains of the Alaska and Aleutian ranges. This basin, known as the Cook Inlet basin, became a focus of early Alaska oil and gas exploration, hosted the first major Alaska oil field and remains an active target for oil and gas exploration and production. In its entirety, the basin extends beyond Cook Inlet under the western side of the Kenai Peninsula, under the lower land on the west side of the inlet and under the waters of the Shelikof Strait.

Oil remains exploration target

Although in recent years the Cook Inlet basin exploration focus has tended to move from oil to natural gas, there is still a market for oil, especially for use in Tesoro’s Nikiski refinery on the Kenai Peninsula.

Pioneer Natural Resources is investigating the feasibility of developing a known oil accumulation in the Cosmopolitan unit, offshore west of the southern Kenai Peninsula near Anchor Point. The field would be developed from onshore using extended-reach drilling if Pioneer sanctions it. Oil from Cosmopolitan would probably be trucked to Nikiski.

In 2007-08 Pioneer successfully drilled the Hansen 1A-L1 sidetrack well at Cosmopolitan and tested the production of 400 to 500 barrels per day of oil. The drilling also found the potential for some gas production, probably through a 16-mile pipeline that would have to be constructed to connect with the Kenai Kachemak pipeline to the north.

Pioneer had planned to drill a second Cosmopolitan delineation well in 2009, but the collapse of oil prices in the wake of the evolving 2008 world economic crisis caused the company to place its drilling plans on hold. Meantime, the company is continuing to analyze the results from its previous well, to work on the project design and to deal with the permitting.

Chevron, which acquired all of Unocal’s Cook Inlet oil fields and oil facilities when it took over that company in 2005, has ambitious plans to extend the life of its offshore Cook Inlet oil fields and to explore for new oil reserves. In March 2008 the company drilled two wells to try to establish new oil from the Anna platform in the Granite Point field, which lies on the west side of Cook Inlet.

The company told Petroleum News in November 2008 that, although the results from those Anna wells had proved disappointing, a $100 million to $200 million Cook Inlet oil exploration program was still moving ahead, albeit with a possible re-evaluation in the light of collapsed oil prices.

But it is unclear what the long-term impact of the early 2009 eruption of Mount Redoubt volcano will be on oil exploration and development on the west side of Cook Inlet. The eruption caused the temporary shut-in of the Drift River oil terminal, located at the base of the volcano and providing the only means of exporting oil from the west Cook Inlet oil fields. The terminal reopened in August, but with its tank farm bypassed and a tanker having to call in every two weeks to offload oil piped to Drift River directly from storage tanks at production facilities at Granite Point and Trading Bay. The terminal shut-in caused the oil fields on the west side of Cook Inlet to also be shut-in for several months, with possible long-term impacts on field production rates.

Gas producers look for new resources

Marathon, ConocoPhillips and Chevron are the main producers of natural gas from the Cook Inlet basin.

For several years Marathon has been carrying out a program of infield drilling to sustain gas deliverability from its existing gas fields, primarily from the Kenai and Ninilchik fields on the Kenai Peninsula, using its own Glacier 1 rig.

However, 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 Region 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.

ConocoPhillips, operator of the offshore North Cook Inlet gas field and the Beluga River gas field on the west side of the inlet, has recently been engaged in a new spurt of Cook Inlet drilling activity in these fields. In January 2009 the company announced a 20 percent cut in its Alaska capital spending, but the company did not say whether this cut would impact its Cook Inlet drilling plans.

Chevron drilled two development wells in the Grayling gas sands on the west side of Cook Inlet in 2008. And on the Kenai Peninsula, Chevron used the Nabors 106E rig to drill a new gas development well in the aging Swanson River field, and to drill two gas development wells in the Happy Valley field.

The company also plans to use the Nabors 129 rig that ConocoPhillips has been using at Beluga River to drill two new delineation wells in the Ivan River and Stump Lake gas fields on the west side of Cook Inlet. The idea is to develop new production from these old gas fields.

Independents explore for gas onshore

Houston-based Aurora Gas was formed in 2000 to pursue natural gas opportunities in the Cook Inlet region, mainly focusing on known, relatively shallow gas plays. The company operates five gas fields on the west side of Cook Inlet: the Kaloa, Lone Creek, Moquawkie, Three Mile Creek and Nicolai Creek fields.

After a nearly two-year hiatus in drilling activity as a result of litigation over a suspended gas supply contract with Enstar Natural Gas. Co., the Southcentral Alaska local distribution company, Aurora Gas restarted operations with its AWS-1 rig in the late summer of 2008, doing some development and workover drilling in its gas fields.

Aurora Gas has a joint venture agreement with Swift Energy Co. for exploration drilling on Aurora acreage in the Cook Inlet basin. The joint venture drilled a dry wildcat well in the Endeavour oil prospect near Anchor Point on the Kenai Peninsula in 2006. Since then, as a result of a change in exploration focus by Swift and a lack of interest by Kaiser Francis Oil Co., Aurora’s major owner, in further Cook Inlet exploration drilling, Aurora has placed its exploration ideas on hold.

In 2008 Armstrong Cook Inlet LLC, the Alaska affiliate of Denver-based Armstrong Oil and Gas Co., successfully drilled a delineation well in a known gas pool in the North Fork unit in the southern Kenai Peninsula. Field viability requires a price above $7 per British thermal unit and the company is now looking for a purchaser for the gas, Ed Kerr, Armstrong’s vice president of land and business development, told the state House Resources Committee in March.

In September the company announced that it had signed a contract with Enstar to supply North Fork gas to Enstar. The contract requires Enstar to construct a gas pipeline south from the Kenai Kachemak pipeline to Anchor Point, northwest of Homer. The unit owners at North Fork have committed to build a pipeline west from North Fork to connect with the new Enstar line, and to drill two new gas wells at North Fork.

The gas supply contract with Enstar requires approval by the Regulatory Commission of Alaska.

The proposed new pipelines connecting to North Fork could open up the possibility of developing other gas prospects in the southern Kenai Peninsula.

Offshore drilling requires jack-up rig

Some of the larger known oil and gas prospects in the Cook Inlet basin lie under the waters of Cook Inlet, in a geologic trend that extends southwest from ConocoPhillips’ venerable North Cook Inlet gas field, the offshore field that was established as the primary gas source for the Nikiski LNG plant on the Kenai Peninsula.

These prospects consist of Northern Lights, Corsair, Kitchen and East Kitchen.

The Northern Lights prospect lies in a down dip extension of the undeveloped Sunfish oil discovery underneath the North Cook Inlet field. Corsair, in the middle of Cook Inlet to the southwest of Northern Lights, consists of a large NNE-SSW trending anticline with both gas and oil possibilities in multiple horizons. Kitchen lies along the same structural trend, southwest of Corsair. East Kitchen lies in an anticline about six miles northeast of Port Nikiski.

The only one of these prospects that has ever been drilled is Corsair, where Shell, Phillips and ARCO drilled a total of five exploration wells between 1962 and 1993. The wells all had gas shows and some also tested small quantities of oil.

Unfortunately, drilling in any of the prospects would require bringing a jack-up rig to Cook Inlet, probably from the Gulf of Mexico, an expensive and financially risky undertaking.

Independents push for jack-up

However, for several years Houston-based independent Escopeta Oil, under Danny Davis, its president, has been championing the cause of using a jack-up rig to drill some new exploration wells in Cook Inlet. Escopeta has particularly focused on the Kitchen prospect, where it holds state leases. Davis thinks that there might be 7.5 trillion cubic feet of natural gas and 1.7 billion barrels of oil in the prospect, although the state has classified the prospect as “highly speculative.”

In early 2006 Escopeta secured the use of a jack-up rig and subsequently obtained an unprecedented waiver to the Jones Act to enable the company to bring the rig to the Cook Inlet from the Gulf of Mexico on a foreign flagged vessel. The company subsequently ran into problems getting the rig north and postponed its drilling plans.

Subsequently California-based Pacific Energy Resources, having obtained the Corsair unit as part of its purchase of Forest Oil’s Cook Inlet properties in 2007, determined that it would try to bring a jack-up to the inlet for the open-water season of 2008, to conduct a drilling program in conjunction with Escopeta and Renaissance Alaska, the company that by this time had become operator of the leases at Northern Lights.

But all came to naught.

Pacific Energy did not succeed in bringing the jack-up to the inlet. In March 2009 the company filed for bankruptcy protection and by the summer of 2009 was disposing of its Cook Inlet assets through a Delaware bankruptcy court.

Meantime, frustrated by the lack of progress toward offshore drilling but anxious to encourage exploration of the offshore prospects, Alaska’s Division of Oil and Gas was engineering a deal in which existing units and leases at Northern Lights, Corsair and Kitchen would be combined into an expanded single unit called “Kitchen Lights,” with Escopeta as operator. Escopeta had farmed in Corsair from Pacific Energy, and Northern Lights from Renaissance and Rutter and Wilbanks.

Under the Kitchen Lights plan of exploration, Escopeta must have a jack-up rig en route to the Cook Inlet by June 20, 2010, with a Kitchen or East Kitchen well spudded by the end of that year. Further wells are required in subsequent years.

Texas-based Renaissance Alaska LLC transferred its Northern Lights leases to Escopeta as part of the deal to form the Kitchen Lights unit. But Renaissance also holds 10,008 acres in state Cook Inlet offshore leases that cover the company’s North Middle Ground Shoal and Northwest Cook Inlet prospects, as well as 47,582 acres on the Kenai Peninsula on its onshore North Sterling and West Eagle prospects. The plan is to drill the offshore prospects if Escopeta brings a jack-up rig to Cook Inlet, Mark Landt, Renaissance vice president for land and administration, told Petroleum News Oct. 6.

Renaissance is in the process of transferring its Cook Inlet basin leases to Stellar Oil & Gas LLC, a separate company owned by Renaissance executives Mark Landt, James Watt, Alan Huckabay and Vijay Bangia, Landt said. Stellar Oil & Gas is seeking new funding for its Cook Inlet exploration activities.

News flash: Just prior to going to press in late October, Davis said he was optimistic about having a jack-up in Cook Inlet by spring 2010.

Most exploration in upper Cook Inlet Tertiary

There are two major sequences of hydrocarbon-bearing rocks in the Cook Inlet basin: a younger and shallower sequence that is Tertiary in age, and an older and often deeper sequence that is Mesozoic in age. And the basin is generally divided into two major regions: the upper Cook Inlet basin north of the southern end of the Kenai Peninsula and the lower Cook Inlet basin extending southwest from the southern limit of the upper basin.

The upper Cook Inlet basin has been the prime focus of oil and gas exploration and is the only part of the basin with producing oil and gas fields.

This part of the basin attains its greatest depth near the northwest corner of the Kenai Peninsula. In that area about 25,000 feet of Tertiary, coal-bearing, terrestrial sediments overlie a thick sequence of marine Mesozoic sediments. The rocks include an abundance of hydrocarbon sources, reservoirs and traps.

A broadly similar sequence of Tertiary rocks extends across the whole upper Cook Inlet area, but thins toward the edges of the basin and toward the lower basin.

Oil exploration in the area initially targeted the Mesozoic strata but the 1957 discovery of the Swanson River oil field in Tertiary sediments shifted the attention of subsequent exploration to the Tertiary. To date there have been 11 significant oil finds and 28 significant gas finds in the upper Cook Inlet area, with all of the finds occurring in the Tertiary — all of the oil and gas produced in Southcentral Alaska comes from these fields.

And because the geologic stresses that have operated during the evolution of the basin have tended to fold and fracture the rock strata along a northeast-to-southwest trend, the oil and gas fields in the basin tend to line up along that trend, following the crests of large geologic structures.

The largest oil field in the upper Cook Inlet, the McArthur River field, had produced 624 million barrels of oil by the end of 2006, with ultimate recoverable oil reserves of about 646 million barrels, according to data published by Alaska’s Division of Oil and Gas. The largest gas field, the Kenai field, had produced 2.314 trillion cubic feet of gas with ultimate recoverable reserves of about 2.458 tcf.

Although the reservoirs of the Cook Inlet oil and gas fields lie within Tertiary rocks, petroleum geologists have determined that the oil actually originated from source rocks in the Mesozoic, in what geologists refer to as the middle Jurassic. On the other hand, although some gas would have been generated by thermal processes from Jurassic source rocks along with the oil, most of the gas originated by itself from bacterial processes in coal-rich Tertiary sediments.

Cook Inlet exploration has mainly targeted large structures in the Tertiary, and some undiscovered oil accumulations probably remain in this type of setting. However, some geologists believe that substantial quantities of oil lie within Mesozoic reservoirs. But, given the expense and relative risk of deep drilling, very few wells have targeted this Mesozoic play.

A 2004 study by the U.S. Department of Energy has also pointed out that the exploration of large oil-bearing structural traps has probably left undiscovered many gas accumulations in the Cook Inlet basin. From a statistical analysis of the known gas accumulations, DOE has estimated that there may be as much as 10 tcf to 14 tcf of undiscovered natural gas in the Tertiary of the upper Cook Inlet area. DOE believes that much of this undiscovered gas lies in the stratigraphic and combination traps that people exploring for oil largely ignored.

Focus on subtle gas plays

With the exception of some undeveloped offshore prospects, exploration for new hydrocarbon accumulations has tended to move away from the big structures, many of which have been drilled and produced. Attention is now starting to focus on subtle, off-structure plays that may contain some of the huge quantities of Tertiary gas thought to still exist in the Cook Inlet basin.

The poor quality of the seismic data for the Cook Inlet area has become an issue when searching for these subtle stratigraphic plays. The thick Tertiary section contains many coal seams and exhibits big density contrasts. This type of geology dissipates seismic energy and gives poor seismic reflections. It has even proven difficult to apply modern 3-D seismic techniques for delineating stratigraphic traps.

Considerable effort is now going into gaining a better understanding of how best to use 3-D techniques in the Cook Inlet geological situation, especially in the deeper parts of the section. And Alaska’s Division of Geological and Geophysical Surveys is engaged in a multiyear Cook Inlet basin research project, with the geology of stratigraphic traps as a major focus.

The difficulty in interpreting seismic data, the need to search for subtle traps and uncertainties about the lateral continuity of subsurface rock strata make the Cook Inlet a challenging area to explore — problems with reserve estimation in the Redoubt Shoal field have illustrated some of the risks in reservoir assessment with less than complete subsurface information.

In addition, onshore land access can prove complex because of a multiplicity of land ownership arrangements. However, companies are managing to handle the complexities of dealing with geology that doesn’t always line up with land ownership boundaries.

The Susitna basin

Much of the broad area of lowland stretching north from the northeast end of Cook Inlet and crossed by the Susitna River and its various tributaries, as well as by lesser waterways, lies over another basin, referred to by geologists as the Susitna basin and forming what some consider to be a northern extension of the Cook Inlet basin. A major geologic fault, the same fault that delineates the northwest side of the Cook Inlet basin, divides the two basins.

Tertiary rocks, many corresponding to similar rocks in the Cook Inlet basin, occupy the Susitna basin, but the oil-pron

Cook Inlet region offers opportunity and challenge

Nearly all of the operating oil and gas fields in Cook Inlet derive from exploration done in the 1950s and 1960s, before the discovery of the giant Prudhoe Bay field caused the attention of explorers to switch to the North Slope. As a consequence, only limited exploration of Cook Inlet has taken place in more recent decades.

Although past exploration in the region focused primarily on finding oil, large volumes of gas were also encountered during that drilling effort. A resulting excess supply of stranded natural gas drove the construction of LNG and fertilizer plants at Nikiski on the Kenai Peninsula and has enabled the residents of highly populated Southcentral Alaska to enjoy cheap gas for heating and electricity generation.

In recent years, as production from old oil and gas fields has declined, demand for gas has started to come into balance with supply, while the price of gas in Southcentral Alaska has begun to rise, thus heightening new interest in gas exploration in the Cook Inlet basin.

In 2008 the U.S. Department of Energy granted a two-year extension to the export license for the LNG plant from 2009 to 2011. And the owners of the LNG facility (Marathon and ConocoPhillips) agreed to do some new Cook Inlet gas exploration drilling as part of a deal with the State of Alaska that ensured state support for the license extension.

On the other hand, Agrium, the owner of the Nikiski fertilizer plant, closed the plant in 2007 because of a lack of adequate gas supplies at viable prices. Agrium investigated coal as an alternative feedstock to natural gas for fertilizer production, but said in March 2008 it had determined that its proposed coal gasification facility to supply syngas for the plant was not economic. However, new gas discoveries in Southcentral Alaska or gas from a possible future gas pipeline carrying North Slope gas to the Kenai Peninsula might result in the fertilizer plant being reopened, Agrium has said.

Industrial underpinning

Industrial facilities such as the Nikiski LNG plant underpin the Cook Inlet gas industry by providing a large and relatively stable market for the gas. And, as part of the state’s deal with the LNG plant owners at the time of the LNG export license renewal, the owners agreed to allow gas producers other than themselves to supply some of the gas used by the plant.

Local gas and power utilities are the other main purchasers of Cook Inlet natural gas. But these utilities constitute quite a small market, with a gas demand that fluctuates widely between warm summer days when gas usage is relatively low, to frigid winter conditions when gas usage, especially for space heating, is very high.

The LNG plant provides an invaluable service by curtailing liquefaction of export gas during severe winter cold, to enable gas producers to meet the exceptionally high gas deliverability requirements of the utilities. And, also to bolster winter gas deliverability, Marathon and Chevron operate gas storage facilities that use depleted gas reservoirs to store excess gas produced in the summer for later use during the winter.

Alaska’s Division of Oil and Gas has held discussions with some companies about the possible establishment of additional storage facilities. The division would like to see these facilities offer storage services to third-party companies, thus making the Cook Inlet gas market more flexible and perhaps creating new opportunities for the sale of gas by independent producers.

Gas badly needed

And new natural gas production from Cook Inlet is badly needed, given the dependence of Southcentral Alaska residents and businesses on gas for heating and power. Despite assuming the cessation of exports from the LNG plant after 2011 and despite also assuming the continued development of existing gas fields, projections of total Cook Inlet gas production show a shortfall relative to utility demand after 2019, Kevin Banks, director of Alaska’s Division of Oil and Gas, told the Alaska House Special Committee on Energy in March 2009.

Winter gas deliverability has become especially tight: On Jan. 3, 2009, Enstar Natural Gas Co, the main Southcentral Alaska gas utility, hit a peak daily throughput of 314.5 million cubic feet, causing the LNG plant to reduce its daily gas consumption to just 40 million cubic feet, a volume that Enstar said was close to the lower limit for the plant.

But some significant market challenges face an explorer wishing to find and produce new Cook Inlet natural gas reserves.

In the first place, with virtually all existing utility gas supplies tied up in medium- and long-term contracts between the utilities and a relatively small number of established gas producers, it is very difficult for a new market entrant to find a sufficient market to render a new gas field viable. There is no effective spot market for gas in Southcentral Alaska.

And then, in the absence of a spot market, there is the tricky question of pricing the gas. Because the gas price forms the dominant component of the price that Southcentral Alaska consumers pay for energy, and because regulated utilities supply that energy, the Regulatory Commission of Alaska, the state’s regulating agency, in effect regulates Cook Inlet basin utility gas prices. A series of challenges to pricing in new utility gas supply contracts in recent year resulted in what one RCA commissioner has characterized as “the Cook Inlet Gas War.”

However, the August approval of a supply contract between ConocoPhillips and power utility Chugach Electric Association, with gas prices indexed to a basket of prices from gas producing areas in the Lower 48, may provide a precedent for the approval of future utility contracts.

Geology of Cook Inlet region

The surface topography of volcanoes, mountain ranges, flatlands and sea passages around the Cook Inlet area provides dramatic evidence of the way in which major pieces of the Earth’s crust, known as plates, move around the Earth’s surface, tossing up mountain ranges in places and dragging down deep basins in others.

One of the plates, the Pacific plate, slides north along the California and Pacific Northwest coastlines before slipping beneath another plate, known as the North American plate, along a zone marked by the Aleutian trench, south and east of Kodiak Island and the Alaska Peninsula. The massive forces unleashed by this titanic struggle between two of the larger pieces of the Earth’s crust have uplifted a chain of coastal mountain ranges, including the Chugach and Kenai mountains, while heat generated deep underground has caused lava and ash to spew up through an arc of volcanoes, known as the Aleutian archipelago. And as the Pacific plate has slid downward beneath the Earth’s surface it has dragged down an elongated section of the North American plate to form the Cook Inlet basin.

Two rock sequences

There are two major sequences of hydrocarbon-bearing rocks in the basin.

The events that led to the formation of the first of these sequences began around 350 million years ago, when a volcanic arc in the general vicinity of the present-day Alaska Range poured lava and volcanic materials into adjacent areas. Then, around 240 million years ago, uplift of the area occupied by the volcanic arc started tipping sediments south into a marine basin in the area of the current Cook Inlet. As this basin slowly subsided beneath an ancient sea, many thousands of feet of stratified marine sediments, some rich in organic material, accumulated.

These older and deeper strata of the Cook Inlet basin are referred to as the Mesozoic.

Uplift of the land around 70 million years ago started to form the Kenai and Chugach mountain ranges. Erosion of the mountains then dumped sediments into a Cook Inlet basin that was by then above sea level. Deposition of river-borne sand and gravel alternated with luxuriant swamp vegetation growth. Through this repetitive cycle of vegetative growth and sediment deposition, peat layers were developed and buried, producing present-day coal formations. The nonmarine sands and gravels would later become oil and gas reservoirs in what is referred to as the Tertiary section.

Uplift, accompanied by deformation and fracturing of the rocks, continues today, thus making the Cook Inlet a seismically active region. As a result of a massive earthquake in March 1964, most of the western Gulf of Alaska including Prince William Sound was uplifted while the entire Cook Inlet basin from the Talkeetna Mountains to Kodiak Island sank. Areas of active volcanism still exist and are considered to have high geothermal potential.

Fault bounded

The present day Cook Inlet basin sits between two northeast-southwest trending geologic faults that form massive fractures in the Earth’s crust, where the rock strata inside the basin have sunk and tipped inward. One fault runs along the northwest side of the Kenai Mountains, while the other fault runs parallel to the northern Cook Inlet shoreline a few miles onshore.

An area of uplifted rock known as the Augustine-Seldovia arch, under Cook Inlet west of the southern tip of the Kenai Peninsula, divides the upper Cook Inlet basin from the lower Cook Inlet basin. The Mesozoic section contains oil-prone source rocks, including known oil sources in what geologists refer to as the middle Jurassic Tuxedni Group. The Tertiary section contains abundant coal seams and other organic-rich sediments that form a source gas formed by bacterial action, rather like methane bubbling from a dung heap.

Both the Mesozoic and the Tertiary contain potential oil and gas reservoir rocks, although in the Mesozoic strata rock compaction combined with various forms of chemical and thermal alteration may have degraded the reservoir quality. Many sands in the Tertiary strata have excellent reservoir characteristics, although the way in which these sands were deposited from rivers and lakes has tended to result in reservoirs divided into many thin, lens-shaped compartments.

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