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Vol. 14, No. 39 Week of September 27, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

North Fork’s a go

Pipelines will connect Kenai Peninsula field to Southcentral gas network

Alan Bailey

Petroleum News

Armstrong Cook Inlet, operator of the North Fork unit in the southern Kenai Peninsula, has signed a contract with Enstar Natural Gas Co. for the supply of gas from North Fork into Enstar’s Southcentral Alaska gas pipeline system, the company’s CEO Bill Armstrong told Petroleum News Sept. 22.

“We do have a contract signed between us and Enstar to get a pipeline built down to our North Fork unit,” he said.

The gas supply agreement for North Fork gas is actually between Enstar and Anchor Point Energy LLC, a company formed from the five North Fork unit working interest owners. Armstrong Cook Inlet will remain unit operator and has been taking a lead in the North Fork project.

The agreement involves the construction by Enstar of a pipeline from the existing Kenai Kachemak pipeline, south along the coast to Anchor Point, and the construction of an 8-mile pipeline by Anchor Point Energy, east from Anchor Point to North Fork.

And under the terms of the contract Armstrong Cook Inlet has also agreed to drill two new gas wells at North Fork, Armstrong said.

RCA approval

The new contract will require approval by the Regulatory Commission of Alaska before any pipeline construction work or drilling can commence — Enstar submitted a tariff advice for its proposed new gas supply to RCA on Sept. 21. However, Armstrong Cook Inlet has already been talking to contractors about pipeline construction. And Enstar has submitted to RCA an application to approve an expansion of its service territory, so that its subsidiary Alaska Pipeline Co. can move ahead with the construction of the Enstar component of the required pipeline.

If everything proceeds smoothly, North Fork gas could start flowing north by early 2011, Armstrong said.

And according to Enstar’s tariff advice that timeframe would dovetail into helping fill an anticipated gap in Enstar’s future gas supplies for Anchorage and the Matanuska-Susitna Valley.

“We’re definitely excited about the possibility to fill that gap that we have (starting) in 2011,” John Sims, Enstar’s manager of corporate communications and customer service, told Petroleum News Sept. 23. “… The opportunity for some independents to come in and actually do some exploration and development is a real positive piece as well.”

Part way

However, the North Star gas will only go part way to filling Enstar’s supply gap: The commitment from North Star is to deliver 1.2 billion cubic feet of gas annually to Enstar, while Enstar’s projected supply shortfall for 2011 is 10.4 billion cubic feet, according to the tariff advice. And the new pipeline could make natural gas available to the 1,800 residents of Anchor Point, the tariff advice says.

The total contracted gas commitment from the North Fork field is 10 billion cubic feet.

And, apart from the fact that Enstar needs the North Fork gas to help meet its supply needs for its existing customers, the field is too small to consider as a viable gas source for the town of Homer, a significant population center without gas supplies, just 10 miles south of the field — a town the size of Homer would require gas reserves in the range 25 billion to 30 billion cubic feet, coupled with a backup gas source, Sims said.

On the other hand, the routing of a pipeline past Anchor Point, near to where Pioneer Natural Resources has been engaged in appraisal drilling in its Cosmopolitan oil prospect, raises the future possibility of using that same pipeline to ship out any gas produced along with oil at Cosmopolitan. And there are other gas prospects in the Anchor Point-North Fork area that might become tempting exploration and development targets, once there is a gas pipeline nearby.

“It opens up a lot more territory,” Armstrong said.

Indexed to NYMEX

Under the terms of the contract, the gas price will be indexed to quarterly average gas futures on the New York Mercantile Exchange, with a floor price of $6.85 per thousand cubic feet and a ceiling price of $9.90 per thousand cubic feet. The Nymex prices are based on prices in the Lower 48 Henry Hub market, Enstar said.

The floor price is slightly below the lower end of the price range of $7 to $10 per thousand cubic feet that Anchor Point Energy has previously stated as being needed to make North Fork viable; the ceiling price is “a meaningful cap, as requested by the commission in previous orders,” Enstar said.

The floor and ceiling prices will be adjusted for inflation, and the pricing formula includes provisions to dampen price volatility. The contract requires Anchor Point Energy to support a portion of Enstar’s seasonal swing in gas demand, but there is no premium or tiered pricing provision for heightened supply rates during periods of peak demand.

Given Enstar’s urgent need for additional gas in 2011, the utility has asked RCA to expedite its review of the new contract.

“We’re hoping that this will be something they can expedite, based on the needs of our customers,” Sims said. “We feel that’s pretty important.”

Discovered in 1965

Standard Oil of California originally discovered gas at North Fork when it drilled the North Fork 41-35 well in 1965, when searching for oil in the area. After a couple of changes in unit ownership over the years, NorthStar Energy acquired the unit in 2000. In 2001 NorthStar tested the 41-35 well and reported a flow of 4 million cubic feet per day of natural gas from one interval at a depth of 8,500 feet.

Then in 2003 NorthStar struck a deal with Enstar to supply North Fork gas to Homer. That deal required NorthStar’s sister company, Alliance Energy, to build a pipeline from North Fork to Anchor Point, with Enstar building a pipeline from Anchor Point to Homer. However, the contract with Enstar and the subsequent RCA approval of that contract were both contingent on Alliance drilling a second North Fork well, to demonstrate an adequate gas reserve base to support Homer gas demand.

That second well was never drilled and by early 2007 the original plan to ship gas by pipeline from North Fork had morphed into a proposal to truck compressed natural gas from the single North Fork well to the Kenai Kachemak pipeline, farther north on the Kenai Peninsula.

But later in 2007, Armstrong Cook Inlet, an affiliate of Denver-based Armstrong Oil and Gas, took over the North Fork unit, as a first step in what the company said it hoped would become a continuing involvement in Cook Inlet basin exploration and development. Armstrong Oil and Gas had already established something of a reputation for itself in Alaska by bringing Pioneer Natural Resources, Kerr-McGee and Eni Petroleum to the North Slope in 2002-05 and facilitating the discovery of the Oooguruk and Nikaitchuq oil fields.

Second well

Armstrong Cook Inlet reverted to the original development plan for North Fork — the shipping of gas by pipeline from the field — and in June 2008 spudded a second North Fork well, the North Fork 34-26, using the Aurora Well Services AWS-1 rig.

“We have successfully tested one sand, the main one, and it bore out what we thought it would. We have other sands left to test … but our focus now is on selling the gas,” Ed Kerr, vice president of land and business development for Armstrong Oil and Gas, told Petroleum News in December 2008 when describing the results from the new well.

Kerr did not say which sands were being tested, nor did he identify the main sand that was successfully tested, but the company had previously said the 9,100-foot North Fork 34-26 well was being drilled into the Tyonek Sands that were proven productive more than 40 years earlier by the original well, which is about 1,700 feet away from North Fork 34-26.

And in March 2009 Kerr told the Alaska House Resources Committee that his company was “very comfortable” that North Fork holds natural gas reserves in the range 7.5 billion to 12.5 billion cubic feet.

Kerr also told the committee that, prior to any further drilling at North Fork, his company was trying to find a market for the North Fork gas.

That search has now obviously borne fruit. And after a contract negotiating process that has been time consuming but generally positive, Armstrong hopes that his company’s experience will encourage others to explore the Cook Inlet basin.

“Hopefully this will be the beginning of multiple operators coming down here and doing things, because there is quite a bit of territory that has yet to be drilled,” Armstrong said. “… The perception from the outside looking in is that Alaska is not really open for business.”

Armstrong said that his company had, in fact, found the state administration to be accommodating, and that it had also found Enstar to be good to work with.

“Everybody’s always looking for opportunities and it’s pretty well known that Anchorage is going to have a difficult time getting enough gas,” he said.

Alaska needs more players, more service contractors, more competitors.

“We’re optimistic about the potential for the Cook Inlet,” Armstrong said. “It’s a pretty unexplored basin.”

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