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Vol. 11, No. 10 Week of March 05, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Chevron: Cook Inlet a keeper

Unocal spirit lives on after merger; assets to be fully integrated with Chevron Alaska

By Steve Sutherlin

Petroleum News

Chevron Corp. will keep the Unocal Cook Inlet assets it acquired in the $18 billion 2005 takeover of Unocal Corp., according to John Zager, Chevron’s general manager in Alaska. The company plans to undertake a four-year Cook Inlet investment plan to increase oil yields from its platforms.

In testimony to legislative committee meetings March 1 in Juneau, Zager said people thought Chevron would get rid of the Unocal assets in Cook Inlet, but his team worked hard to convince Chevron’s management the assets were worth keeping.

Zager said the company plans to begin a multi-year investment plan in Cook Inlet.

“With our partners’ approval, we could invest $200 million over four years in just the oil part of our Cook Inlet business,” he said.

Zager said Chevron will retain all current employees and downtown Anchorage offices, adding that 99 percent of the Cook Inlet operation employees reside in Alaska. The company’s Alaska work force is expected to grow over the next few months, he said

Zager said the company plans to undertake 35-50 investment opportunities in Alaska that “run the gamut from new well bores to deeper pool tests,” to enhanced oil recovery projects.

“No rank exploration wells,” Zager said. “All the wells will be drilled off existing platforms in Cook Inlet.”

Asset integration pending

Chevron has decided to fully integrate its Unocal and Chevron Alaska assets, Chevron spokeswoman Roxanne Sinz told Petroleum News.

A strategic evaluation of Alaska properties identified potential long-term value which can be delivered by the full integration of all Unocal and Chevron production properties and development opportunities in Cook Inlet and on the North Slope, she said.

“Chevron’s next step toward integrating its Alaska assets is an organizational planning process which is now under way, and implementation is anticipated to begin in the near future,” Sinz said.

Zager said Chevron-Unocal had “free-cash flow” profits from Alaska operations of $300 million in 2005,

“We hope to be here and operating for a long time,” he said.

Vulnerable profit margins

Zager said the economics of the company’s Cook Inlet infrastructure meant profits could become marginal, or worse, if oil prices fall. Because of that, he said, the company’s position in Cook Inlet isn’t as fat as it may appear on the surface in light of current high oil prices.

“Cook Inlet offshore assets are financially challenged,” he said.

At its heyday in the 1970s, Unocal’s wells produced 200,000 barrels of oil per day, but in 2006, production will be closer to 12,000 barrels per day, Zager said.

“North of $30 per barrel of oil is our breakeven point on earnings in Cook Inlet,” Zager said. When asked if this includes depreciation, he said no.

With depreciation added into the picture, the breakeven point on Cook Inlet oil was closer to $45 dollars, Zager said, adding that for a public corporation, earnings after depreciation are important to investors.

“At current prices we’re obviously making some cash flow out there, but it’s hard to plan your business based on 50 dollar oil or 60 dollar oil,” he said.

Zager said Chevron’s Cook Inlet investment will be carefully scrutinized to measure up against other opportunities the company has available.

In Cook Inlet, the company’s board considered a number of “incremental investment opportunities,” Zager said, adding that the 35-50 projects the company decided to do in Cook Inlet “stacked up against” other investments in Chevron’s investment portfolio — although they came in at the low end of the scale. A similar number of investment opportunities did not make the cut.

Chevron’s upcoming expenditures in Cook Inlet will be redevelopment expenditures to alleviate an expected sharp decline in oil output from its platforms there, with a goal to “at least keep production flat,” Zager said.

Zager said Unocal considered shutting down some of the lower-performing platforms in Cook Inlet, but it gambled and kept the marginal platforms running —which for the time being, appears to have been a good bet because of recent high oil prices.

The fixed cost of running the company’s 10 aging Cook Inlet platforms is something the company can’t make much of a dent in — in fact the costs, on a per barrel basis, will rise as the facilities age and oil production volumes fall, Zager said. Closing marginal platforms isn’t the panacea it might appear because the cost of operating infrastructure to serve all the platforms will be then spread over a smaller number of platforms, he said.

“The platforms out there are kind of co-dependent on each other when it comes to expenses,” he said.

Unocal has relied on water injection to boost the output from inlet wells as they decline. The water has made the oil more expensive to handle. Today the wells produce 90 percent water and only 10 percent oil. Separation and water re-injection costs eat into profits, Zager said.

Zager said the company is eyeing the progress of a proposed coal to gas project Agrium Inc. is exploring, to provide feedstock for its Kenai nitrogen fertilizer plant. Agrium’s coal to gas process would provide large quantities of carbon dioxide suitable for injection into oil fields to enhance recovery.

Carbon dioxide, however, might not be the best answer to extend the economic life of the company’s Cook Inlet oil wells. Zager said converting a field from water injection to carbon dioxide injection is a very expensive proposition — an idea that needs more study.

Open to more opportunities in the inlet

Zager said that while the company’s incremental investments were aimed at getting another four year’s of production out of the wells, the company hopes to learn enough in the process to carry on with new enhancements.

“You learn a lot as you go along; hopefully we’ll identify a number of projects that will allow us to roll forward another three or four years,” Zager said. “Success often leads to success; on the other hand there’s the case that you have some key failures, than maybe the whole capital plan doesn’t get executed.”

Gas shines dimly

Because Cook Inlet natural gas prices are sharply lower than prices elsewhere in the United States, Cook Inlet gas exploration is a dicey proposition, Zager said, adding that until Cook Inlet gas prices rise, oil is the golden commodity in the basin.

“Higher prices will incite more exploration,” he said.

Industrial users such as Agrium pay prices for natural gas that are far below prices in the contiguous 48 states, even below Canadian prices, Zager said. With no access to spot markets, Cook Inlet gas producers need to find long-term contract users for any production, limiting the price.

Zager said Unocal has had a limited pool of buyers for gas. The company sells gas to Tesoro’s Nikiski refinery, Enstar Natual Gas Co., Chugach Electric Association, Agrium, and Aurora Gas LLC.

“People here have been accustomed to very low-priced gas for a very long time,” he said.

Because of Cook Inlet market realities, pure natural gas exploration in the basin doesn’t look all that attractive now, Zager said, adding that Unocal has had mixed success looking for new gas onshore.

“Some of the gas we’ve found has been in such small volumes, it’s really not commercial,” he said.

Unocal began production in November 2005 from the most recent well drilled at its Happy Valley discovery at the Deep Creek unit southeast of Ninilchik on the Kenai Peninsula. Unocal completed its first well in the Deep Creek unit, the NNA No. 1, in January 2002, but converted it to a disposal well after testing several intervals which were wet or tight.

Unocal has since drilled 10 Happy Valley wells. Two Lower Tyonek intervals in the Happy Valley No. 1 well tested at 4.1 million cubic feet per day, and Unocal drilled delineation wells in 2003 and 2004.

The company plans to install compression equipment at Happy Valley in 2006, but it has deferred additional drilling for the year, Sinz said. 

“We continue to expand our peak gas delivery rate by installing gas storage capability at Pretty Creek Field on the west side of Cook Inlet and by expanding storage capacity at Kenai Gas Storage facility located in Swanson River Field,” she said.

The company has also invested in drilling with Marathon Oil Corp. at the Ninilchik Unit, where Marathon is the operator. 

Offshore gas opportunities are even less likely to light a flame.

Zager said the economics for offshore gas exploration are “not there,” adding that offshore Cook Inlet natural gas is “a little behind the eight-ball” when it comes to competing with investments elsewhere in the world.

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