Over the next few years, policymakers debating oil and gas exploration in Alaska are likely to turn the experience of BlueCrest Alaska Operating LLC into a case study.
BlueCrest became one of the newest producers in Alaska last year when it brought the offshore Cosmopolitan unit into production after decades of delays by several previous operators. The company is now in the early stages of an oil development program.
But momentum for additional exploration drilling stalled last year after the state vetoed tax credits. Now plans to expand operations at the Cook Inlet unit have become uncertain.
BlueCrest brought the Cosmopolitan development into production from the Cosmopolitan No. 1 well, which the company had helped drill in 2013 as an exploration well and later converted to development. Throughout 2016 and the early months of 2017, the company began drilling the first wells in a five-well development program and built facilities that could accommodate current drilling plans as well as some future expansion.
The Hansen drilling pad near Anchor Point includes slots for as many as 20 wells, and the associated production facility can accommodate as much as 10,000 barrels per day. The 38-acre parcel is much larger than the current pad and facilities, allowing for expansions.
The current development program is using an onshore pad near Anchor Point to drill directional wells to an offshore target. But operator BlueCrest Alaska Operating LLC has also talked about its desire to use the Spartan 151 jack-up rig to drill offshore wells into shallower oil and natural gas prospects located above the main oil reservoir at the field.
In an application to the U.S. Fish and Wildlife Service in early 2016, BlueCrest described a three-well exploration program that included offshore and onshore components. The company would test offshore gas prospects by drilling two directional wells from the same location as the Cosmopolitan No. 1 well from 2013 and would collect geological information about oil formations using a third well drilled from a nearby surface location.
By July, the company had withdrawn the application. Even at the time BlueCrest submitted it, the likelihood of it pursuing gas exploration anytime soon was doubtful.
That was partly because of frustration about the tax credit veto.
“What (the governor’s action) did is create a tremendous distrust of the state’s integrity going into the future,” BlueCrest President J. Benjamin Johnson said in July 2016. “Unless something is worked out to help the small oil companies work through the payment delay, this is going to have a long term negative impact to the state and will surely come into play as the state tries to obtain financing for new capital programs.”
In addition to uncertainty about tax credits, the company was worried about the state of the local natural gas market, which is largely satisfied through contracts expiring in early 2018.
In previous years, BlueCrest had announced a partnership with the liquefied natural gas company WesPac Midstream LLC. Under the terms of the deal, WesPac would have financed the entire natural gas development program and would have controlled all of the production from the field, although BlueCrest would have technically operated the program and would have gradually increased its ownership to as high as 80 percent. The program initially called for drilling in 2016 with production starting as early as 2018.
BlueCrest has also pointed to other exploration opportunities at Cosmopolitan.
According to the company, a 3-D seismic program from 2005 “suggests that the southern exploratory blocks potentially have producible hydrocarbon deposits at a deeper depth,” which would require some “additional evaluation” to determine if the deposits are economically viable. Both the oil and gas developments are focused on leases near the center of the unit, leaving areas to the north and the south for future exploration work.
In particular, the company has identified a prospect worth exploring in the south, located predominately within ADL 391899 and potential extending into two neighboring leases.
AIDEA financing
A difficult financial situation even forced BlueCrest to ask the Alaska Industrial Development and Export Authority to revise the terms of a loan issued to the company.
Citing a combination of the loss of tax credits and delays bringing a rig to the region, the company asked the public corporation to delay some of the early timelines of the loan and to change the terms of a reserve account established as part of collateral for the loan.
In April 2015, AIDEA agreed to lend BlueCrest $30 million toward the $40 million cost of manufacturing, transporting and building a new custom drilling rig for Cosmopolitan.
As part of the deal, AIDEA used the drilling rig as collateral and required BlueCrest to establish a reserve account to offset any potential difference between the purchase price and future sale price of the rig. BlueCrest intended to use tax credits to fund the account.
AIDEA approved the extension in late 2016.
Half-century odyssey
Using the previous tax credit program, and the particulars of the market, BlueCrest was able to accomplish what five previous operators had failed to do over 49 years.
Pennzoil discovered Cosmopolitan in 1967 but never pursued development. The results of its two-well drilling program failed to interest the company, and the southern Kenai Peninsula was well beyond the terminus of the Cook Inlet distribution system at the time.
ARCO Alaska acquired the prospect in the 1990s, and Phillips Inc. inherited the leases after it acquired ARCO’s producing assets in Alaska in early 2000. Using new drilling technology, Phillips drilled the Hansen No. 1 exploration well in 2001. The well confirmed the original discovery and also found productive sands in a deeper formation.
After acquiring the prospect in a merger, ConocoPhillips Alaska Inc. drilled the Hansen No. 1A sidetrack of the original well in 2003 and conducted a promising flow test.
ConocoPhillips brought Pioneer Natural Resources on as a partner in 2005. The companies commissioned a 3-D seismic survey but did not pursue any drilling.
After they dissolved their partnership, Pioneer became operator of the field. The company drilled the Hansen No. 1A-L1 long-reach undulating lateral off of the sidetrack in 2007.
Although it slowed its activities at Cosmopolitan in response to the financial crash of late 2008, Pioneer eventually fracture stimulated an interval in the Hansen No. 1A-L1 well in 2010 and flow tested the well. Under a pilot program to truck Cosmopolitan oil to the Tesoro refinery to the north, Pioneer produced more than 33,000 barrels from the field.
By early 2011, the company had soured on the project. It terminated the Cosmopolitan unit and relinquished all its leases except the two that were held by wells, which it sold to BlueCrest and its operating partner at the time, the independent Buccaneer Energy Ltd.
After drilling the Cosmopolitan No. 1 well, Buccaneer announced previously unknown oil-bearing intervals, and some gas production, too, but postponed a “more extensive flow test.” Before it could drill a follow-up well, Buccaneer sold its minority stake in the Cosmopolitan prospect to BlueCrest in an attempt to improve its financial situation.
