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Vol. 13, No. 28 Week of July 13, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Betting on exploration

Alaska officials wager gas line from Cook Inlet to Fairbanks will spur drilling

Eric Lidji

Petroleum News

The newest in-state gas pipeline plan for Alaska is based on a bet.

By connecting a region with a declining supply of gas to another region desperate for affordable fuel, the state is betting it can jump-start production of untapped Cook Inlet reserves by using demand from the Interior like a battery and a pipeline like a set of jumper cables. (See related story on this page.)

What remains unclear is whether the jolt will do the trick.

The state, Enstar Natural Gas Co. and the Alaska Natural Gas Development Authority think it will. Those three parties announced a public-private partnership on July 7 to explore a pipeline running from Cook Inlet to Fairbanks.

“We’ve always maintained that if you pre-build the pipeline, you would generate the market forces that would cause a lot of things to happen,” said Harold Heinze, chief executive officer of the Alaska Natural Gas Development Authority. “And in this case, just the commitment of the state to do this kind of a project ought to encourage the local exploration, because it does expand their market.”

It could be the answer...

Although the plan is new and details remain sketchy, the state wants the pipeline to run from Cook Inlet to Fairbanks through Glennallen and Delta Junction in order to hit military installations and state leases on the way to the population center of the Interior.

Those new markets could mean a 30 to 50 percent increase over existing Southcentral demand, according to Bill Popp, president of the Anchorage Economic Development Corp. and formerly involved with oil and gas issues for the Kenai Peninsula Borough.

Numbers like those might even approach the demand of an industrial customer like the mothballed Agrium fertilizer plant in Nikiski or the liquefied natural gas plant in Kenai.

“In effect, you are adding a very significant volume of gas demand to the market,” Popp said. “From a purely speculative point of view, this gets pretty interesting.”

Popp said the previous solutions for offsetting dwindling Cook Inlet supplies always involved bringing northern gas to Southcentral. Flipping the direction, he said, creates a “horse race,” where the winner will be the first company to explore and produce gas — whether in the Cook Inlet or another part of the state.

That scenario not only gives explorers across the road system equal access to the new pipeline and new markets, it also lifts an old burden from Cook Inlet producers, according to Kenai Peninsula Borough Mayor John Williams.

“There has been concern in the past that if we bring too much gas south from up north it probably would delay exploration for gas here,” Williams said.

Williams believes a pipeline heading north out of Southcentral will “undoubtedly spur development in Cook Inlet.”

...or it could be a stretch

Not everyone agrees, though.

At first glance, the concept is rather counterintuitive: How could more customers do anything but further strain the declining gas supply in the Cook Inlet?

“I can’t quite understand the logic of shipping gas north out of Cook Inlet,” said Dan Britton, president of Fairbanks Natural Gas, the only gas utility in Fairbanks. “The market in Fairbanks can’t support that type of expense.”

Fairbanks Natural Gas stands to gain or lose based on the outcome of the pipeline. After struggling to get a contract for gas from Cook Inlet, the company is now building a liquefaction plant on the North Slope to truck supplies down to Fairbanks.

This newly proposed pipeline could make that plant unneeded. At least theoretically, once the pipeline reached Fairbanks it would connect to the distribution grid Fairbanks Natural Gas has spent the past decade building through the city.

While Britton has not discussed the pipeline with either ANGDA or Enstar, he said he’s skeptical of the basic assumption that demand from Fairbanks will spur development in the Cook Inlet.

Will the explorers explore?

The big question, and perhaps the only one that matters, is whether the explorers and producers in the Cook Inlet agree or disagree.

So far, neither the state, nor ANGDA, nor Enstar have specifically asked the largest gas producers in Cook Inlet whether the new residential and industrial demand along the proposed route would be enough to stimulate exploration.

And those companies — Chevron, ConocoPhillips and Marathon — seem reluctant to commit to multimillion-dollar drilling programs based on a press conference.

“As an operator in the Cook Inlet, Marathon has consistently invested in exploring for and developing new gas resources which meet the needs of our customers, while helping create a foundation for further economic development,” Lee Warren with Marathon wrote to Petroleum News. “We will be reviewing the Governor’s gas line proposal as more details become available.”

ConocoPhillips spokeswoman Natalie Lowman pointed to the company’s busy Cook Inlet drilling program this year, one of the busiest in decades for the company, but said the company couldn’t speculate on future demand.

Chevron spokeswoman Roxanne Sinz said her company didn’t know enough about the pipeline proposal to comment on it at this time.

Bargaining with a drill bit

In recent months, the state has successfully used exploration as a bargaining tool with the industry, and plans to continue with that strategy, according to Deputy Commissioner of Natural Resources Marty Rutherford.

To get state support for a federal extension of the export license for the Kenai LNG plant, ConocoPhillips and Marathon agreed to drill several development wells in legacy fields in Cook Inlet this summer. ConocoPhillips even decided to drill wells in the North Cook Inlet unit beyond the requirements of the state.

During those negotiations, the state told the companies that support for any further extensions would only come “in exchange for significant extra drilling commitments,” according to Rutherford.

“And both companies have said they’re very open to that,” Rutherford said.

Chevron, the largest producer in the Cook Inlet, is also drilling new development wells this summer to get more gas from some of its most productive units.

What about the independents?

Those big companies are exploring in the oldest and most productive fields in the area.

But many believe the bulk of the undeveloped gas reserves in Cook Inlet sit along a set of long underground formations running diagonally through several offshore leases and units: the Corsair unit, the Kitchen unit and the Northern Lights prospect.

The North Cook Inlet unit on the northern end of the formation is among the most productive in Alaska, but other units to the southwest have remained underexplored for decades. Large and small companies have tried to develop those prospects for years, but failed for various reasons, including several years of low commodities prices.

Recent attempts have run up against a huge obstacle: the lack of drilling rigs.

Exploring these prospects in the waters of Cook Inlet requires a jack-up rig, and for decades companies have been unable to get one to Alaska.

Earlier this year, relative newcomer Pacific Energy Resource Ltd. out of California signed a three-year deal to bring one to Cook Inlet from the Caribbean. Not knowing if or when another jack-up might find its way to Alaska, Pacific Energy planned to use the rig to develop the Kitchen unit for Escopeta Oil and possibly the Northern Lights prospect for Renaissance Alaska.

But for several months, Pacific Energy has been fighting with the state to hold on to expired leases adjacent to, but outside the Corsair unit.

The company claims the leases are essential to making the field economic, but the state said the leases went too long without being developed, and therefore should be put back into the pool of acreage available at the next lease sale.

Pacific Energy has suggested it might not be able to justify bringing the jack-up rig to Alaska without those additional leases.

Even with the jack-up rig in Alaska and ready to drill, the timing could be tight. The three prospects would obviously have to use the rig consecutively. Exploring and developing the three prospects in time to commit to a pipeline by 2013 would be a quick turnaround.

Sights set on Glennallen

The state isn’t putting all its chips on Cook Inlet.

By initially looking at a route running through Glennallen, the three parties hope and expect this new pipeline will spur development of the Copper River basin.

That prospect dates back at least 50 years to when Amoco drilled the unsuccessful Moose Creek No. 1 well in the area in the late 1950s and early 1960s. Copper Valley Machine Works drilled the Alicia No. 1 well in the area in 1983.

Efforts since 2004 have focused on Rutter and Wilbanks Corp., a Texas independent exploring on behalf of Anschutz Exploration and Pacific Energy on land owned by Ahtna Inc., a Native regional corporation with royalty rights on the project.

The company has drilled a well and several sidetracks over the years, but exploration attempts have been beset by poor tests, high-pressure rocks, large amounts of water in the reservoir and the recent failure to land a rig.

Still, the company knows it’s sitting on gas.

“We’ve absolutely proven to have gas in that formation,” Bill Rutter Jr. told Petroleum News in January. “It could be 100 bcf or it could be 300 bcf. It’s definitely commercial.”

Rutter Jr. expected to sell any gas his company developed to local utilities, or maybe build a small pipeline to Palmer. A pipeline already running through the area, though, would considerably broaden the market for Copper River gas, according to Rutherford.

“It’s not the type of field that can support expensive transportation systems,” Rutherford said about the Copper River basin. “But (a pipeline) will spur activity, just because it will be going right through the basin.”

Nenana or the foothills

Although the state is focusing on its holdings in the Copper River basin, it insists this pipeline will be able to take advantage of other prospective basins.

One of the most talked about of those basins is on Doyon Ltd. land near Nenana, an area that could be accessed with a 40 to 60 mile spur line, according to Rutherford.

Another nearby prospect is in the Yukon Flats. The state is currently considering whether to issue an exploration license to a California company looking to drill in that area.

If all else fails, the pipeline will simply keep heading north until it finds a supply of gas.

For most of the year, Enstar has been promoting an effort to partner with Anadarko Petroleum, the company exploring for gas at Gubik in the foothills of the Brooks Range.

“We think that the Gubik field is still the best destination with regard to the reserves that we need,” said Gene Dubay, chief operating officer for Continental Energy Systems, the parent company of Enstar. “There may be reserves in the Copper River or the Nenana basin that are picked up to add more reserves to this line, but ultimately we think that the line’s end point will be at the foothills.”

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