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Vol. 16, No. 19 Week of May 08, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Fortune Hunt Alaska: Hunting for elephants in Cook Inlet

It’s good times for Southcentral Alaska explorers as promising geology gets boost from government

Kay Cashman

Petroleum News

Dwindling oil and gas production and an aging infrastructure are normally the hallmarks of a mature oil and gas province. But despite its collection of declining oil and gas fields, Southcentral Alaska’s Cook Inlet basin remains substantially underexplored, as evidenced by the sparse distribution of on- and offshore exploration wells in the region (see satellite image on page 74).

Cook Inlet, a major sea inlet between the Kenai Peninsula and the mainland of Southcentral Alaska, lies over part of a deep sedimentary basin between the Kenai Mountains and the mountains of the Alaska and Aleutian ranges. The basin extends beyond Cook Inlet under the western side of the Kenai Peninsula, under the lower land on the west side of the inlet and under the waters of Shelikof Strait.

Since the late 1950s the Cook Inlet basin has produced about 1.4 billion barrels of oil and 10 trillion cubic feet of natural gas, but U.S. Geological Survey scientists have theorized that only 4 percent of the petroleum that could have been generated by the basin’s source rocks has ever been found. And the U.S. Department of Energy’s 2004 report on the basin’s natural gas hypothesizes that there are missing giants — large oil and gas fields — that remain to be discovered.

Even more surprising is the fact that only a handful of wells have been drilled in the Susitna basin, a northern extension of the Cook Inlet basin.

So, as residents of Southcentral Alaska become increasingly concerned about tightening natural gas supplies, and as the region’s main oil refinery has to import more and more of its feedstock, significant oil and gas resources remain to be found in Cook Inlet.

Two sequences

There are two major sequences of hydrocarbon-bearing rocks in the basin: a younger and shallower sequence that is Tertiary in age with sandstone reservoirs, and an older, deeper sequence that is Mesozoic in age.

Upper Cook Inlet basin, the prime focus of oil and gas exploration and the only part of the basin with producing oil and gas fields, attains its greatest depth near the northwest corner of the Kenai Peninsula. In that area about 25,000 feet of Tertiary, coal-bearing, terrestrial sediments overlie a thick sequence of marine Mesozoic sediments. The rocks include an abundance of hydrocarbon sources, reservoirs and traps.

A broadly similar sequence of Tertiary rocks extends across the whole upper Cook Inlet area, but thins toward the edges and toward the lower basin.

Oil exploration initially targeted the Mesozoic strata but the 1957 discovery of the Swanson River oil field in Tertiary sediments shifted the attention of later explorers to the Tertiary. To date there have been 11 significant oil finds and 28 significant gas finds in the upper Cook Inlet area, with all of the finds occurring in the Tertiary.

Basin’s challenges

Exploring the Cook Inlet basin can be challenging. Fields typically contain multiple small reservoirs that may be difficult to find. Deposition of the Tertiary sediments from rivers and river fans, spreading from the ancient mountains surrounding the basin, has given rise to rock units that are often discontinuous. River channels and fans can be difficult to differentiate using single rock samples from wells, thus giving rise to issues such as knowing how far a particular reservoir may extend.

“There’s been a lot work over the years by the industry to try to predict reservoir continuity,” per geologist Paul Decker of Alaska’s Division of Oil and Gas.

Also, perhaps because of clay content of the sediments, it is often difficult to recognize pay zones using well logs, said Tim Ryherd, a commercial analyst with the division. It is not always obvious where the gas sands are, even if you drill right through the middle of a gas reservoir, he said.

And, Decker said, acquiring high quality seismic in the basin can be difficult, in part because of the basin’s complex structures. The coal seams in the Tertiary sequence also tend to absorb seismic energy.

Nonetheless, Cook Inlet basin explorers have found some sizable fields. The largest oil field, McArthur River, had produced about 628 million barrels of oil by the end of 2008, with recoverable oil reserves of about 646 million barrels.

Stratigraphic traps

A quick inspection of a map of Cook Inlet’s discovered fields shows that they follow two main trends on either side of the basin axis — one trend passes up the west side of the Kenai Peninsula and the other trend passes up the west side of Cook Inlet.

The trends lie on either side of the central axis of the basin.

“If you look at a map of the well plots there’s very few in the core, along the axis (of the basin),” Ryherd said.

Interestingly, the Kitchen oil and gas prospects, where Escopeta Oil plans to drill this summer from a jack-up rig, is on the axis of the basin.

Decker also said much of the drilling in the Cook Inlet basin has focused on the crests of the major structures in the basin. He thinks there is scope for exploring the flanks of the structures, where fluids will likely have migrated up the structures. There is also scope to explore for stratigraphic traps.

“So far the basin has only really been explored for structural, not for stratigraphic traps,” he said.

Mesozoic possibilities

The possibility of finding oil and gas in the Mesozoic, beneath the Tertiary basin, intrigues geologists, especially since Cook Inlet oil originated from the Jurassic Tuxedni group within the Mesozoic sequence, having presumably percolated upwards.

Cretaceous rocks in the Mesozoic exposed at either end of the basin show evidence of oil formation, Ryherd said.

However, geologists have also been concerned about the potential for minerals called zeolites to clog the pores of potential reservoir rocks — the chemistry of the Mesozoic rocks tends to be conducive to zeolite formation.

But Decker thinks that the nature of the Mesozoic under the basin is not well understood. In fact the Mesozoic oil and gas potential has become one of several focuses of a multiyear Cook Inlet research program begun in 2006 by Alaska’s Division of Geological and Geophysical Survey, or DGGS.

It’s almost free

Drilling into the deeper Mesozoic is very costly. To encourage exploration and development, the State of Alaska offers Cook Inlet oil and gas producers one of the most favorable tax and royalty environments in the United States, with total rates at or below every other major producing state: Cook Inlet oil is assessed no production tax, and a 12.5 percent royalty rate; natural gas’ royalty rate is the same but its gross production tax rate varies, depending on gas prices — at $5 per mcf it’s 3.6 percent, which assumes no capital credit-write-off.

Plus, the state pays up to 40 percent of exploration costs. And production tax increases and decreases with oil prices and the level of investment; in other words, the more you invest, the less tax you pay.

And there is a credit for capital investments, plus a 25 percent credit for net losses

On top of that, in 2010 Alaska lawmakers passed a bill with a $25 million tax incentive for the first offshore Cook Inlet well drilled by a jack-up into the Mesozoic. Subsequent wells get $22.5 million and $20 million if they are drilled with the same jack-up.

Apache impressed

A few new explorers have entered the Cook Inlet basin since the state’s incentives have increased, the most notable Apache Corp., which acquired its initial 200,000 acres in 2010.

John Bedingfield, Apache’s vice president for worldwide exploration and new ventures, said Cook Inlet is intriguing because of its “tremendous” oil potential.

In a way, he said, Cook Inlet was a victim of the enormous Prudhoe Bay discovery in 1968, which drew investment and attention away from what had been an impressive oil and gas province in its own right.

Although Apache’s main interest is oil, it’s mindful of the ready local market for natural gas, Bedingfield said.

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