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Vol. 19, No. 29 Week of July 20, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2014: Furie nearing the finish line at Kitchen Lights unit

Installation of an offshore platform this fall would set the stage for production in third quarter

Eric Lidji

For Petroleum News

Furie Operating Alaska LLC could become the newest producer in Alaska this year.

The local subsidiary of Texas-based Furie Petroleum Co. recently completed four exploration wells at the offshore Kitchen Lights unit and is beginning development work.

While Furie is a relatively new name in the Cook Inlet, it has a long history. The company started as Escopeta Oil Co., but changed its name and its management as the small independent was bringing a long-desired jack-up rig to the Cook Inlet basin.

Escopeta had spent more than a decade arranging an offshore exploration project in the upper Cook Inlet, but Furie executed the program and is now seeing it to completion.

The details of the deal are private, but Furie and its German owners had been investors in Escopeta. “Let’s just say we got to the point where we wanted to control our own destiny,” Furie President Ed Oliver told Petroleum News in September 2011. “We took it over in Vancouver. We have funded it all the way. It’s been our money from day one.”

Considerable preparations

The current program is the latest step in a long journey.

Under the leadership of its former president, Danny Davis, Escopeta had managed to arrange a complicated exploration program in upper Cook Inlet. The program required amassing leases, finding funding and bringing a jack-up rig to the region.

The complexity proved controversial.

The lengthy efforts to find funding and secure the jack-up rig repeatedly pushed the exploration program beyond the state-mandated deadlines for work commitments.

What might normally have been a procedural debate between a company and regulators grew when lawmakers accused the state of jeopardizing exploration as existing supplies were dwindling. The relatively commonplace issue took on an even greater magnitude because of concurrent efforts to get ExxonMobil to develop the Point Thomson unit.

As if all that weren’t enough, as Escopeta was finalizing its long-standing effort to secure a jack-up rig, the Alaska Industrial Development and Export Authority and Buccaneer Energy Ltd. announced a separate partnership to purchase a jack-up for the Cook Inlet.

To make matters even more complicated, Escopeta drew fire from marine groups - and later from the federal government - for violating the federal Jones Act by using a foreign ship to bring its jack-up rig from the Gulf of Mexico to Cook Inlet in 2011.

Despite those conflicts and challenges, Escopeta managed to bring the Spartan 151 jack-up rig to the Cook Inlet in summer 2011 and drilled the first half of an exploration well at Kitchen Lights before docking the rig in Port Graham for upgrades during the winter.

A big announcement

Because the rig arrived in summer, Furie only had to time to drill the planned 16,500-foot Kitchen Lights Unit No. 1 well to 8,805 feet before suspending operations for the season.

The suspension, in part, came from state requests to slow the pace of drilling for safety.

Even so, the company made waves.

“Furie came; we drilled; and we found gas,” drilling engineer Bob Laule said at the annual RDC conference in December 2011, adding that testing of the unfinished well “gave us some very good indications of gas in the Sterling and in the Beluga formations.”

Specifically, Furie said, the well discovered approximately 46.7 billion cubic feet of gas in place, which, extrapolated over a larger area, suggested some 3.5 trillion cubic feet.

If correct, the figures would rank among the largest discoveries ever for the Cook Inlet basin, but some state officials and industry watchers expressed skepticism, saying that the announcement pushed the upper limits of what geologists expected the basin to contain.

Speaking to lawmakers in March 2012, Furie President Damon Kade estimated probable gas reserves of 750 billion cubic feet and peak production of 30 million cubic feet per day from Kitchen Lights, far lower than the blockbuster November 2011 estimate. The lower figure was based a smaller geographic drainage area, Kade later told Petroleum News.

The announcement made sense, given that Kitchen Lights had unified several smaller prospects. Kade said a deeper well might encounter additional gas, as well as oil.

Extension granted

The long process of deadlines and defaults had yielded a deal where Escopeta agreed to drill into the Jurassic formation by Oct. 31, 2011. While Furie began drilling in early September, the state asked it to suspend operations to accommodate additional safety inspections and gave the company the go ahead to continue on Oct. 13. Even with a later than expected freeze-up, Furie was unable to complete the well by the end of the season.

After the season, Furie asked the state for a four-year extension - until Jan. 31, 2016 - to meet its drilling commitments, citing both the discovery and the suspension of work.

The state approved the extension, which came with a four-to-five-well plan of exploration as well as talk of a future plan of development with an offshore platform.

The exploration component of the plan proposed spreading out drilling to assess various small prospects within the unit. The initial Kitchen Lights Unit No. 1 and No. 2 wells would be in the Corsair prospect. The Kitchen Lights Unit No. 3 well would be in the central block. The Kitchen Lights Unit No. 4 and No. 5 wells would be in the southwest block. A proposed Kitchen Lights Unit No. 6 well would be in the northern block.

Actual drilling, to date, has been more focused. Furie drilled the Kitchen Lights Unit No. 1, No. 2 and No. 3 wells, plus a sidetrack, in the Corsair Block. Furie started drilling the Kitchen Lights Unit No. 4 well is in the northern block in 2013. The company suspended the well last winter and had not completed drilling as of press time.

A single well in the upper Cook Inlet costs some $25 million to $30 million, according to Kade, and the initial two-well program and wintering expenses would cost $80 million.

Drilling under way

The Spartan 151 returned to Kitchen Lights in late April 2012.

Having cemented the well to 4,800 feet, Furie needed to redo some drilling, but by late May the company had finally deepened the well beyond its initial suspended depth.

By August, drilling had stopped at 15,298 feet, more than 1,000 feet shy of the target depth and also shy of the target pre-Tertiary rock, to leave time to begin the second well.

While drilling began at Kitchen Lights Unit No. 2, the well only reached some 9,000 feet, according to Petroleum News sources. By October 2012, Furie told the state that it finished sidetracking the well and planned to test several gas-bearing zones in the Beluga.

In early 2013, Furie parent company Deutsche Oel & Gas AG, out of Germany, released an assessment of “roughly one ninth of its production area in Kitchen Lights unit.” The assessment estimated a mid-case scenario of 72.1 million barrels of oil and 543.8 billion cubic feet of gas “classified as ‘probable’ and ‘prospective’ exploitable reserves.”

Under generally accepted definitions, “probable” indicates 50 percent likelihood of the actual amount meeting the estimate and “prospective” indicates 10 percent likelihood.

Deutsche subsequently pulled the release and never responded to requests for comment.

By June 2013, Furie had completed the Kitchen Lights Unit No. 3 well. The well targeted natural gas at a depth of some 10,000 feet in an attempt to delineate the initial discovery.

While Furie tested the well, it declined to release results.

“We had a good test,” President Damon Kade told Petroleum News in July 2013.

The company began drilling the Kitchen Lights Unit No. 4 well soon after, but only reached halfway to total depth by the time the summer drilling season ended.

Saying it had “encountered potential oil and gas reserves,” Furie permitted a 3-D seismic campaign as it completed the well. The campaign would “characterize the subsurface geological structure and confirm exploration and drilling targets and reservoirs.”

Several months later, SAE Exploration began permitting a separate 3-D seismic survey - independent of Furie - covering a similar region around the Kitchen Lights unit.

Development plans

The drilling results convinced Furie to consider development strategies.

In filings with the U.S. Army Corps of Engineers, Furie described the proposed KLU Platform A as having a 64.5-foot by 72-foot deck, an 18-foot diameter caisson and two subsea gathering lines connecting to a new production facility. The company said it hoped to begin construction in early 2014 and begin production by the end of that year.

By the end of 2013, Furie said it had completed engineering design and was ordering certain materials for the platform. “We’re well beyond the design phase,” Kade said. “Our target is to get that installed next year and get gas to the beach by fourth quarter.”

In a plan of operations filed in early 2014, Furie said the Kitchen Lights Unit No. 3 well had proved up the undeveloped gas reserves in the region. The company estimated 30 billion cubic feet of gas per year. The production would start from the KLU No. 3 well, but Furie said it might drill as many as six wells to maximize production. The plan also said the two pipelines would initially transport up to 100 million cubic feet per day.

Permitting and construction posed challenges enough, but Furie was also thinking about market conditions. The company joined several smaller producers in the region to protest a proposed four-year contract between Hilcorp Alaska LLC and Enstar Natural Gas Co.

The contract provided short-term supplies for the Southcentral region, but the smaller producers worried about being shut out of the market until the contract ended in 2018.

The contract came out of a solicitation that Enstar sent to producers and potential producers in the region. In a letter to the Regulatory Commission of Alaska, Furie said it had responded to the solicitation and offered to provide gas starting in late 2014.

To prove its credentials, Furie offered to show Enstar “confidential well flow test data” from its Kitchen Lights drilling, plus its plans for the facilities it intended to install, according to Kade. 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.”

As of May 2014, Furie said fabrication work was nearing completion. The company expected the platform to arrive in the Cook Inlet in July, with onsite installation to be completed in September and production starting sometime during the third quarter.

Jones Act issue unresolved

Throughout all this, Furie has continued to deal with the Jones Act violation.

U.S. Customs and Border Protection levied a $15 million fine against Escopeta in October 2011 for moving the rig to Alaska without a valid waiver of the Jones Act.

The fine represented the assessed value of the rig.

Escopeta appealed the decision, saying the fine should only be $675,000, or 5 percent of the value of the rig, because the company needed to get the equipment to Alaska to help bolster flagging natural gas supplies and had been unable to find a domestic ship.

While Escopeta had secured a Jones Act waiver in 2006, it was no longer valid by the time Escopeta brought the rig to Alaska, although the company denied any wrongdoing.

In mid-2012, Furie sued the U.S. Department of Homeland Security, calling the $15 million fine “unwarranted and unprecedented,” and a violation of the “excessive fines” clause of the Eighth Amendment to the U.S. Constitution. Furie believes the fine is the largest ever assessed for a Jones Act violation, although the federal government said it had previously assessed a similar fine, which, with inflation, would now be larger.

Even though the initial 2006 Jones Act waiver had been deemed invalid by the time the exploration campaign began in 2011, Furie argued that the factors behind the waiver - the need for additional energy supplies in Alaska to fuel military bases - remained.

After the federal government sought to have the suit overturned, Kade complained that the fine had “made it difficult for Furie to secure investors in its resource exploration and development venture,” which in turn was slowing the pace of bringing supplies online.

The tangle of suits and countersuits continues to play out in court.

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