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Vol. 23, No.45 Week of November 11, 2018
Providing coverage of Alaska and northern Canada's oil and gas industry

The Producers 2018: Investment on the horizon at Kenai Loop

New gas sales agreement allows for increases and decreases in year three

Eric Lidji

for Petroleum News

AIX Energy LLC is beginning a new phase at its Kenai Loop field.

Over the summer, the Texas-based independent completed the terms of the gas sales agreement it inherited from predecessor Buccaneer Energy Ltd. and started a new three-year gas sales agreement negotiated with regional distributor Enstar Natural Gas Co.

The new gas sales agreement reflects the reality of the Kenai Loop field today and the uncertainty going forward. It accounts for increasing production in the first two years and allows the company to either increase production further in year three or to decrease it.

The company is currently considering three related projects that will determine future production rates at the onshore Cook Inlet field northeast of the city of Kenai. One project would install compression at the field to improve reservoir pressure. A second would connect a dormant well to the system. A third would work over existing wells.

In the years since AIX Energy acquired the Kenai Loop field from Buccaneer in late 2014, the company has met its commercial obligations without significant investments beyond those required for daily operations. The cautiousness of this strategy differs starkly from the approach of Buccaneer, which leveraged the equity at Kenai Loop into an ambitious portfolio of Cook Inlet properties and ultimately declared bankruptcy.

In its nearly four years as operator, AIX Energy has generally invested only when required. For example, the biggest infrastructure project over the past year was the decommissioning of a second, unused drilling pad in June 2017. The decommissioning allowed the company to end a surface lease with the Alaska Mental Health Trust.

More investment will become inevitable as Kenai Loop ages. Average production at the field peaked above 11 million cubic feet per day between October 2015 and January 2016, according to figures provided by the company. The field produced 2.827 billion cubic feet in the year ending March 31, 2018, down from 3.159 bcf in the year ending March 31, 2017 and down from 3.657 bcf in the year ending March 31, 2016.

According to terms provided by AIX Energy and Enstar, the new agreement requires AIX Energy to provide a firm supply of 1.370 bcf between July 1, 2018, and March 31, 2019. The volume would increase to 1.464 bcf between April 1, 2019, and March 31, 2020.

Between April 1, 2020, and March 31, 2021, the volume would either decrease to 1.095 bcf or increase to 1.825 bcf (a range of 3-5 million cubic feet per day). AIX Energy has until Sept. 1, 2019, to inform Enstar about the ultimate volume it intends to deliver.

Compression

The plan to add compression is the most expensive one currently on the docket.

In its fourth plan of development, submitted to the state in May 2018, AIX Energy claimed it could meet production obligations through the fall before it would need to install compression. “Extended flowing and shut-in data was used to update nodal analysis and systems models, resulting in a high level of confidence that under current market conditions compression could be deferred until the fall of 2018,” AIX wrote.

AIX Energy publicly raised the inevitability of adding a compression system at Kenai Loop in its first plan of development, submitted to state authorities in May 2015. At the time, the company estimated that the field would need compression within 12 to 18 months, depending on the demand for near-term and non-firm gas sales. The company repeated the 12-to-18-month estimate in its second plan of development from early 2016.

In its third plan, from early 2017, AIX Energy pushed its estimated date for installing compression to this summer and said it would use flowing and shut-in data to assist with planning. The result of that modeling allowed the company to defer the project to fall.

Interconnection and recompletion

Associated with the compression project is a proposal to connect the shut-in KL 1-4 production well into the existing system to increase both deliverability and redundancy.

Buccaneer drilled four wells during its initial development campaign at Kenai Loop. The field is currently producing from KL 1-1 and KL 1-3. The KL 1-2 is temporarily suspended, and AIX Energy has expressed an interest in converting the well to disposal.

Connecting the KL 1-4 well into the system would improve operations by increasing deliverability from the field and creating a backup for the existing wells. The project could potentially increase overall recovery at Kenai Loop, according to the company. In the coming year, AIX Energy plans to perform a cost-benefit analysis of the interconnection project and a related project to recomplete the KL 1-1 and KL 1-3 wells.



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