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Vol. 12, No. 46 Week of November 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

THE EXPLORERS 2007: Marathon continues to chase inlet gas

Company sees significant opportunity in the Cook Inlet region but wants competitive gas pricing and a stable fiscal, regulatory environment in Alaska

Alan Bailey

Petroleum News

Although oil and gas production in Alaska is declining, there are still plenty of resources to find and develop, Mitch Little, Marathon’s Alaska production manager, told Petroleum News Oct. 2, 2007.

“While the (Alaska) industry is certainly maturing … there are still significant opportunities that remain within existing fields and in terms of undiscovered resources,” Little said.

Marathon is a major natural gas supplier in the Cook Inlet region and produces gas from the Kenai, Cannery Loop, Ninilchik, Beaver Creek and West Fork fields on the Kenai Peninsula and from the Chevron-operated McArthur River field on the west side of the Cook Inlet. Kasilof, the company’s newest field, went on stream in November 2006, delivering gas through the Kasilof pipeline to the Kenai Kachemak pipeline on the western side of the Kenai Peninsula.

Market transition

Developing new resources in the Cook Inlet region depends on that market continuing its transition toward competitive pricing — the gas market in the Cook Inlet has in the past seen an excess of cheap gas, priced below market rates in the Lower 48 or elsewhere in North America, Little said.

“Those conditions have probably led to curtailed investment on the exploration and production side and potentially haven’t resulted in as much conservation on the consumer side, or in the power generation or heating efficiency market,” he said.

In other markets that have had to go through the same type of evolution, the transition in price levels has promoted the development of new gas supply sources, Little said. Little expects the same phenomenon to occur in Southcentral Alaska. But it is not yet clear to what extent new gas supplies in the region will come from new Cook Inlet discoveries, from a North Slope gas line or from a combination of the two, he said.

Development of new resources in the Cook Inlet region also depends on a stable fiscal and regulatory environment that reduces the uncertainties in project decision making, he said.

Continued development

Meantime, Marathon continues to work its gas fields around the Cook Inlet — in 2007 the company focused on development drilling in four of those fields: the Ninilchik, Kenai, Beaver Creek and Sterling gas fields.

“We’ve had a fairly active drilling campaign, more or less a continuous drilling program throughout the year utilizing our company owned Glacier drilling rig,” Little said. “We’ve had drilling campaigns in four different field areas and by year’s end we will have drilled nine additional wells.”

The company has been using its Excape completion technology to exploit multiple reservoir sands, especially in the Beluga formation and in the Kenai gas field — the complex geology of the Cook Inlet may result in a single well penetrating as many as 10 to 15 individual reservoir sands, Little said.

“The Excape technology is a completion technique that allows us to perforate and fracture stimulate much more efficiently and cost effectively than traditional methods,” Little said. “We’re able to complete zones of lower quality than were typically completed in the past. … What it’s ideally suited for is fields where there are multiple stacked reservoirs, especially if there are over four intervals that you want to complete simultaneously.”

The company is also in the process of shooting a new 3-D seismic survey in the northern part of the Ninilchik field.

“We’re looking to better characterize the known field area — the majority of the survey is over the field area,” Little said. Marathon is also using the seismic survey to search for any new opportunities at Ninilchik, he said.

Marathon picked up nine tracts around the Ninilchik field in the State of Alaska’s May 2007 areawide lease sale. Little characterized this lease acquisition as “the normal course of business,” consolidating the company’s Ninilchik position.

Sunrise prospect

On the exploration front, Marathon is moving forward with its Sunrise gas prospect, also known as East Swanson, in the northern part of the Kenai Peninsula. The prospect lies in a Cook Inlet Region Inc. holding, inside the Kenai National Wildlife Refuge.

“We continue to be interested in the prospect,” Little said. “We’re advancing it through our normal evaluation processes and we’ve permitted, and plan to acquire additional 2-D seismic data over the prospect later this year. … Plans beyond that would be contingent or dependent on what the seismic reveals.”

And does Marathon have any interest in exploring deep in the Mesozoic section, below the conventional Cook Inlet Tertiary reservoir strata in any of the company’s leases?

“We don’t currently have plans focused on the deeper section, although … we recognize there’s some potential there,” Little said. “We’re not actively pursuing it right now.”

Gas storage

In May 2006 Marathon started injecting gas into a gas storage facility that it had established in the Sterling formation pool 6 C1 and C2 sands of the Kenai gas field. That storage facility has been operating successfully, to enable Marathon to fulfill its contractual obligations to meet demand swings between summer and winter — excess gas can be injected into the storage facility during the summer when utility demand is relatively low and then retrieved during the winter when demand is high.

In 2007 Marathon drilled a second injection well in the facility.

“That (second well) provides us with some redundancy in case of a mechanical problem but also increases our instantaneous injection capability,” Little said.

But the company has no current plans to expand its Cook Inlet gas storage capacity.

“We continue to look at other options but … those are going to be dictated by the prevailing economics of the time and some understanding of where markets are headed,” Little said.

Possibilities for gas storage depend largely on who has the economic incentives to develop either seasonal or peak load storage to accommodate the market requirements.

“In other areas those facilities are commonly built and operated by the local utilities, or in some cases by a third party, but in all those cases it’s where there’s a significant economic incentive for somebody to make that investment,” Little said.

And, in terms of technical options, a small LNG facility to handle needle peaking loads might make sense, he said.

“It’s typical of other gas markets where there are high seasonal swings,” Little said.

But whatever the mechanism for gas storage, achieving reliable gas deliverability through the ups and downs of seasonal demand ultimately costs money.

“It takes significant investment to meet the deliverability requirements — it’s not just the annual volume you’re concerned about. It’s the daily volume,” Little said.

The LNG plant owned by Marathon and ConocoPhillips at Nikiski on the Kenai Peninsula has in the past been able to help with meeting peak utility load by curtailing LNG production during periods of especially high winter gas demand. However, the export of LNG to Japan from the plant represents a significant component of the current Cook Inlet gas industry. The plant’s federal LNG export license expires in 2009 and the U.S. Department of Energy is currently reviewing an application for license renewal.

“We’re certainly hopeful that we’re going to get a positive decision in the near future,” Little said.

Operational safety

Little feels particularly proud of a new safety program that Marathon has been implementing to instill a heightened safety culture with the company’s employees and contractors.

“We’ve continued to emphasize our overall philosophy of safe, clean and responsible operations,” Little said. “We’ve instituted, over the past year or so, a new safety leadership program. In Alaska we’ve now trained over 100 of our company and contract employees. … It’s about making sure that we all hold each other accountable and about learning more effective ways to encourage each other to work safely.”

And, as Marathon moves forward to 2008, what does the company have planned for Alaska?

“At this point I would see 2008 shaping up to look pretty similar to 2007,” Little said. “… We’d be looking to continue with a development-drilling program in our existing fields. We’ve got the two seismic surveys at north Ninilchik and Sunrise that we’ll be interpreting and evaluating next year.”

What happens beyond that will depend to a considerable extent on the continuing evolution of the Alaska gas market, he said. Historically, margins in the Alaska gas market have been slimmer than elsewhere because of high operating costs driven by a challenging climate and physical environment.

But transitioning to a more competitive gas market will not be easy.

“No doubt as the market transitions to a different pricing environment and different contractual responsibilities, it’s going to be difficult,” Little said. “It’s going to put strain on all of the stakeholders. But it’s that kind of change that I think is going to be necessary to access the future (Alaska) potential.”



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Little replaces Barnes in Alaska

The head of Marathon Oil in Alaska, John Barnes, is being replaced by T. Mitch Little who is moving to Alaska from Houston, where he has been managing the company’s Libya assets, Little told Petroleum News Sept. 6.

The change was effective Aug. 13, the company said.

Barnes has accepted the position of director of U.S. Production Operations Strategic Projects, which means he’ll be “leading the initial development of a strategic blueprint to guide the USPO business through its new expansion plan,” Marathon said.

Barnes will continue to report to Steve Guidry, USPO regional vice president.

Little’s title will be asset team manager for Alaska. He will also report to Guidry.

This will be Little’s first assignment in Alaska, he said.

Little said he would be returning to Anchorage on Monday, Sept. 10.

—Kay Cashman