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Vol. 11, No. 22 Week of May 28, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Steady as she goes

Marathon continues to maintain Cook Inlet gas production; Kasilof to come online; Kenai field gas storage starts up

Alan Bailey

Petroleum News

Marathon Oil Corp. is continuing to develop new natural gas production from its existing Cook Inlet fields while also exploring for and developing new gas fields. That was the key message from John Barnes, Marathon’s Alaska business unit leader, in an interview with Petroleum News on May 18. The company’s focus in the Cook Inlet area continues to be natural gas rather than oil, Barnes said.

Marathon produces gas from the Kenai, the Cannery Loop, Ninilchik, Beaver Creek and West Fork fields on the Kenai Peninsula, and from the Unocal-operated McArthur River field on the west side of the Cook Inlet.

Kasilof

Development of the company’s newest gas field, Kasilof, is under way.

“We’re looking for first production before the end of the year,” Barnes said.

Marathon discovered gas in the Tyonek formation at Kasilof two miles offshore on the west side of Alaska’s Kenai Peninsula in early 2004. The discovery involved drilling a 17,000-foot extended reach dual-lateral well, from onshore.

Current focus is on laying a 4.2-mile pipeline connecting the field to the Kenai Kachemak Pipeline. In February Marathon asked the Regulatory Commission of Alaska for expedited authorization for pipeline construction, to enable clearing of the pipeline right of way prior to the start of bird nesting activities in the area. And clearing of the right of way has now been completed.

“Regulatory-wise everything’s gone well,” Barnes said.

Marathon is now preparing for some horizontal directional drilling, to run the pipeline under a stream, a lake and a couple of eagle nest sites. The company hopes to complete the pipeline by August, at which point construction of the production facilities will start.

Cannery Loop

Meantime, development of existing gas fields has continued. And the company has enjoyed particular success at its Cannery Loop field, south of the town of Kenai.

“In the past several years production has gone up there and basically has been at all-time highs for the field,” Barnes said.

Barnes attributed success at Cannery Loop to two main factors: better identification of pay zones in the Beluga formation and the use of the company’s Excape completion technology. Excape involves making custom perforations in individual horizons in a single well — the Beluga formation is notorious for the complexity of its multi-horizon reservoirs. Isolation valves separate intervals in the well during perforation. Once perforation is completed, the valves are opened.

“Particularly in the Beluga you’ll get into tighter rock that 15 or 20 years ago was more difficult to complete — now we can go in and fracture stimulate five, 10, 18 zones at once — that makes a difference,” Barnes said.

Marathon is also in the process of re-activating the Cannery Loop pad 3, the most northerly pad in the field. The company drilled the Cannery Loop 3 well in the 1980s but subsequently de-activated the pad, Barnes explained.

“Based on the results that we’ve seen to date and our completion practices we’re going in to drill the Cannery Loop 11 well on that pad and then we will re-activate the facilities and bring the pad back on production,” he said.

Marathon will also drill a couple of Excape wells in its Kenai field, as part of a continuing drilling program to meet market demands for natural gas.

Production continues at about 40 million cubic feet of gas per day at the Ninilchik field, Barnes said — Ninilchik was discovered in 2002. Marathon maintains high production rates at the field all year round, in support of the company’s base gas load, he said.

The company is installing production facilities at a fifth Ninilchik pad, the Ninilchik state pad.

“We’re also drilling a second well in that pad in June and we have an additional well to be drilled on another pad this year,” Barnes said.

Gas storage

To flatten out production peaks and troughs between high winter natural gas demand and lower demand in the summer Marathon has obtained a state gas storage lease for the Sterling formation pool 6 C1 and C2 sands of the Kenai gas field — the company is injecting its gas into the storage facility during periods of low demand and will extract gas from the facility when demand is high.

“We began gas injection May 8, the day we signed the lease with the state of Alaska,” Barnes said.

The lease only applies to state subsurface land within the field. But the field consists of a complex mix of state and private land — there are extensive homestead land holdings in the area and these land holdings include the subsurface rights. Marathon is still working on unitizing the gas storage, Barnes explained. He noted that unitization for gas storage is distinct from unitization for gas production, because ownership of the subsurface gas may be different from ownership of the storage reservoir rocks.

East Swanson exploration

Barnes said that Marathon’s main exploration activity in the next year will consist of a 3-D seismic survey in the Sunrise gas prospect, commonly known as East Swanson, in the northern part of the Kenai Peninsula. The prospect is in a Cook Inlet Region Inc. inholding inside the Kenai National Wildlife Refuge. Surveying will start in the fall and continue into the spring of 2007.

Although CIRI has the right to extract petroleum resources from its land, the fact that the land is inside the wildlife refuge has required compliance with federal refuge rules and regulations, including the development of an environmental impact statement — the EIS was completed in the spring of 2005.

Barnes said that Marathon enjoys a good relationship with the managers of the refuge.

“We work closely with the refuge management on mitigation of issues and environmental impact statements,” Barnes said. “It’s a cooperative process.”

Barnes said that gas production from a field at East Swanson would use the facilities at the Swanson River field.

Pipeline settlements

The past year has seen the settlement of some disputes regarding the operation in Cook Inlet of some of the gas pipelines that Marathon operates.

In particular, in September 2005 the various parties to a dispute over the regulation of the Cook Inlet Gas Gathering System, or CIGGS, reached a settlement. CIGGS carries gas from production facilities on the west side of the Cook Inlet to Nikiski on the Kenai Peninsula.

“CIGGS is providing private carriage pending RCA approval (of the settlement),” Barnes said. RCA has already held a hearing on the settlement, he said.

A settlement for the operation of the Kenai Nikiski pipeline is going through a public comment period prior to an RCA hearing.

RCA has approved bidirectional flow on the Beluga pipeline that was originally designed to flow gas north from Granite Point on the west side of the Inlet into the utility systems that connect with the Matanuska-Susitna Valley. Bidirectional flow will enable gas fields north of Granite Point to deliver gas direct to the west side of the Kenai Peninsula through CIGGS.

A postage stamp tariff arrangement — a constant tariff rate regardless of the gas input or delivery points on the line — has also been approved for the Beluga line.

Barnes said that there has already been some north to south gas flow on the Beluga line.

“We’re hopeful that we’ll see another shipper actually start moving some additional gas volumes on it,” Barnes said.

Economics and the LNG plant

In response to a question about the future of the LNG plant at Nikiski, Barnes said that the future of that plant is linked to the future success or failure of the Cook Inlet gas industry as a whole. Marathon owns a 30 percent interest in the plant, which will require a new export license in 2009.

“If there’s a strong industry and the ability to develop reserves and resources to meet the local needs as well as to continue to run that plant, our preference would clearly be to continue to operate the plant, for a lot of reasons,” Barnes said. “… It’s nice to have that plant running because it shares the cost of the infrastructure.”

Barnes does not think that the gas industry in the Cook Inlet region has yet reached the level of activity that companies operating in the area really need. Access to land is fairly good and it is possible to work through the various permitting issues, Barnes thinks. But the key factor is establishing gas prices high enough to compete for exploration and development capital, he said.

“You hear a lot about what should the price be, but I think that everyone needs to recognize that people won’t invest money unless they know they can get a return that’s commensurate with the risk,” he said.

Barnes also hopes to see the new state production profits tax recognizing the specific issues that relate to the Cook Inlet.

And what about the possibility of a North Slope gas spur line into Southcentral Alaska?

Barnes doesn’t think that there’s enough information yet about the economics of a spur line to understand the impact of a line on the Cook Inlet gas industry. However, Cook Inlet gas would obviously have to compete on price with North Slope gas.

But with Cook Inlet reserves to production ratios starting to approach the values of seven to nine that are found in the Lower 48, gas exploration and development activity around the Inlet is increasing, Barnes said.

“That’s why we’ve always worked to be an advocate of what’s good for the industry,” Barnes said. “… I’d love to see a stronger industry because a strong industry will have a strong contracting industry. A weak industry has weaknesses in a lot of areas and drags it all down.”



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