A new paradigmHilcorp’s strategy ups Cook Inlet oil production, extends gas contracts Alan Bailey Petroleum News
Characterizing his company’s strategy in the Cook Inlet basin as working hard to drill new wells and remediate old ones, Hilcorp Energy President Greg Lalicker told the Resource Development Council’s annual conference on Nov. 20 that production from the aging Cook Inlet oil fields has been increasing and that his company is developing additional natural gas resources in response to local utility needs. And, contrary to what people may have thought, the Cook Inlet oil and gas fields are not on their last legs, Lalicker said.
“The fields in the Cook Inlet aren’t dying. They’re just middle aged,” he said. “There’s another 20, 30, 40 years of activity to be done out there.”
Hilcorp entered the Cook Inlet oil and gas industry in 2011 when it purchased Chevron’s Cook Inlet oil and gas fields; the company subsequently purchased Marathon Oil Co.’s Cook Inlet assets to become the dominant oil and gas producer in the Cook Inlet basin.
Field development In the middle of 2013 Hilcorp brought in two land-based drilling rigs and two offshore workover rigs in support of its Cook Inlet field development campaign. And that campaign has seen oil production at the Swanson River field on the Kenai Peninsula, for example, climb from some 500 barrels per day when Hilcorp acquired the field to about 2,500 barrels per day at present.
“So it’s up about five fold in the couple of years that we’ve had it,” he said.
Offshore, in the Trading Bay field, production has gone from between 700 and 800 barrels per day to about 2,600 barrels per day. And oil production net of royalties from all of Hilcorp’s Cook Inlet fields has climbed from about 6,000 barrels per day to 10,500 barrels or more, Lalicker said.
After completing the purchase of Marathon’s gas fields last February, Hilcorp embarked on an aggressive well workover program in its Cook Inlet gas assets, while also adding some new gas compression to the gas fields to boost production, Lalicker said.
Gas contracts In April the company met with Southcentral gas utilities to discuss potential new gas supply contracts. But, rather than saying in advance how much of the utility gas demand Hilcorp would be willing to meet, the company asked the utilities how much gas they wanted to buy, Lalicker explained. The company then figured out if it could spend the money necessary to bring the required gas on line and subsequently offered gas supply contracts to meet the utilities’ requirements through to the first quarter of 2018.
Hilcorp plans a similar meeting with the utilities next April, to explain how the company is building out its gas reserves and to find out what gas the utilities need for the year beyond the end of the existing supply contracts.
“We’re just going to keep rolling this forward as we keep spending money proving out more reserves,” Lalicker said. “We don’t think we’re going to run out of gas any time soon. How long the party will last, I don’t know. It depends on how successful we are.”
A year at a time In an interview with Petroleum News after his conference speech Lalicker confirmed his company’s strategy of negotiating new or extended utility gas contracts a year at a time, incrementally extending firm gas supplies into the future. By agreeing to new contracts that do not go into effect for a few years, Hilcorp has two to four years in which to spend the money necessary to bring gas required for the contracts on line, Lalicker said.
In this process, Hilcorp is comfortable placing undeveloped gas reserves as well as developed reserves under contract, confident that, given the utilities’ purchasing commitments, it will be financially viable to drill out the undeveloped gas before the contracts go into effect, Lalicker said.
But developing Cook Inlet gas is not cheap, he said, adding that the cost of developing the gas may have deterred previous field operators from spending money on the gas fields.
“It’s relatively expensive gas,” he said.
Following an agreement with the State of Alaska, addressing concerns over Hilcorp’s dominance of the Cook Inlet gas market, a consent decree between Hilcorp and the state set ceiling prices for utility gas in a range from $6.60 per thousand cubic feet in 2013 to $7.72 per thousand cubic feet in 2017, prices substantially higher than the current price levels of around $3 to $4 in the Lower 48. Lalicker told Petroleum News that Hilcorp believes Cook Inlet gas to be profitable within the consent decree price limits but that companies would not be willing to develop Cook Inlet gas at current Lower 48 prices.
Consistent with L48 fields Lalicker said that Hilcorp’s experience so far with its Cook Inlet oil and gas fields is consistent with what it has found in mature fields that it has previously acquired in the Lower 48. Some of these fields, originally developed in the ’20s, ’40s and ’50s are still producing, up to 20 years after Hilcorp took them over, he said. Fields always have the potential for incrementally more production, although over time development becomes progressively harder and more expensive, he said. For example, the Cook Inlet’s McArthur River field, while it is now producing 6,000 barrels of oil per day, is also producing 110,000 barrels per day of water, requiring more wells and more pumps to process more water if oil production rates are increased.
“There’s nothing magic about what we do,” Lalicker said. “It’s just we’re willing to chase smaller and more challenging projects than what other people were, and put the time and effort into really understanding and re-interpreting the fields.”
Exploration Asked about any Cook Inlet exploration plans that Hilcorp may have, given the company’s acquisition of some leases at a distance from the company’s operational fields, Lalicker said that his company typically allocates 10 to 25 percent of its annual budget to exploratory projects near where it has infrastructure or knowledge, but that there are no plans for a future, distinct Alaska exploration program.
“There’s no grand scheme like that,” he said. “We just keep looking for incrementally good opportunities, be they exploratory or development, and we’ll pursue them as we see how they rank out against one another.”
Alaska workforce During his conference speech Lalicker said that his biggest worry with his company’s Alaska venture is the need to build an organization that can sustain a workforce for decades into the future, given the company’s aspirations in the state.
“To be around for 20, 30, 40 years you’ve got to have great people,” Lalicker said. “To succeed in the Cook Inlet we need to build a great organization in Alaska.”
Lalicker said that 98 percent of the company’s 310 current employees are Alaska residents and that the company uses a work rota that encourages residency rather than encouraging people to commute from out of state. Hilcorp offers people the opportunity to work hard while having “more fun at work than they’ve ever had before,” he said. Hilcorp also encourages involvement in the local community by providing employees with funds for contribution to local charities, he said.
Support services But Hilcorp’s biggest immediate challenge when starting to operate in the Cook Inlet region was the lack of local oilfield support services and the difficulty of convincing service companies to set up or expand their businesses on the Kenai Peninsula, following years of oil industry stagnation in the region, Lalicker said.
“The first thing we needed to do up here was to expand the service industry,” he said, commenting that the service industry includes businesses ranging from wireline services to catering and logistics support.
With an expansion of those services, Hilcorp can conduct more projects in its efforts to revitalize the oil and gas fields, Lalicker said.
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