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Vol. 17, No. 48 Week of November 25, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2012: Armstrong producing, partnering

Denver-independent has brought 4 new players to North Slope in past decade; now bringing gas to southern Kenai

Eric Lidji

For Petroleum News

Armstrong Oil & Gas Inc. has been at the front of two revivals in the Alaska oil industry.

Through its exploration in the 2000s, the Denver-based independent proved up two North Slope prospects later brought online by larger companies new to the state at the time.

And in 2007, Armstrong acquired the North Fork unit, a Cook Inlet natural gas field in the southern Kenai Peninsula discovered in the 1960s but never developed. By the time Armstrong brought the field online in 2011, half a dozen other independent companies were exploring prospects across the basin after years of relatively modest activity.

Today, Armstrong is continuing on both fronts.

On the North Slope, it is partnering with the Spanish-major Repsol on a wide-reaching exploration campaign, and evaluating what it believes to be its own attractive leasehold.

In Cook Inlet, it is expanding its efforts at North Fork by increasing the size of the unit, drilling additional wells and helping to establish into new markets in the region.

More work at North Fork

This fall, a subsidiary, Armstrong Cook Inlet, plans to drill two wells at North Fork.

Armstrong began drilling the NFU No. 23-25 well in September and — once work on the first well is completed — planned to subsequently drill the NFU No. 22-35 well.

(Armstrong permitted four locations total, but only plans to drill two wells for now.)

Both wells aim to increase natural gas production at the southern Kenai Peninsula field, Vice President of Land and Business Development Ed Kerr told Petroleum News Sept. 18. Additionally, Armstrong plans to upgrade facilities to accommodate the changing composition of its production stream and to install compression to increase deliverability.

Both wells start from the existing North Fork facilities. The NFU No. 23-25 well extends to a bottom-hole location to the east while the NFU No. 22-35 well would extend to bottom hole location to the south, according to filings Armstrong made to state agencies.

The two-well program this fall goes beyond Armstrong’s requirements to the state.

Under its current plan of development — the 47th for North Fork, in place until March 2013 — Armstrong must test additional zones in the NFU No. 34-26 well and drill at least one additional well at the field to target a previously untested segment of the Tyonek.

North Slope matchmaker

Because Armstrong is a small company that prefers to operate without debt, it took a novel approach to exploring the complex and expensive world of northern Alaska.

Starting around late 2001, Armstrong began pursuing small prospects overlooked by BP and ConocoPhillips, the two producer-operators on the North Slope at the time. Because these prospects were small only in comparison to the giants of northern Alaska, they proved attractive to large independents and super-majors not yet active in the state.

Through its exploration and partnering efforts, Armstrong brought Pioneer Natural Resources, Kerr-McGee and Eni Petroleum to Alaska by proving up the Northwest Kuparuk, Nikaitchuq and Tuvaaq prospects in the nearshore waters of the Beaufort Sea.

Today, a decade later, the Northwest Kuparuk prospect is the Pioneer-operated Oooguruk unit, and the Nikaitchuq and Tuvaaq prospects are the Eni-operated Nikaitchuq unit.

In addition to stemming production declines, those two units helped diversify the historically small world of northern Alaska oil developments. Pioneer became the first independent operator in North Slope history, and Eni became the first company on the North Slope to operate production facilities independent of BP and ConocoPhillips.

Becoming a producer

Armstrong took a different approach at North Fork.

The unit differed in many ways from earlier projects. It was located in Cook Inlet, not on the North Slope. It was onshore, not nearshore. And it was primarily gas prone.

And this time, Armstrong would be the operator in charge of development.

Standard Oil Co. of California discovered North Fork in 1965 with the NFU 41-35 well, but the field remained fallow until a series of independents attempted to bring it online throughout the 1990s. Those efforts did not yield production, but began regulatory proceedings for extending the gas distribution grid into the southern Kenai Peninsula.

Armstrong has since re-entered NFU No. 41-35 and drilled three wells of its own.

The NFU 34-26 well in the summer of 2008 discovered enough natural gas to justify additional drilling and to negotiate a supply contract with Enstar Natural Gas Co. The NFU No. 14-25 and NFU No. 32-35 in the summer of 2010 delineated the reservoir.

Following up on minor amounts of oil in the original Standard Oil NFU 41-35 well, Armstrong also tested the oil potential of the Hemlock formation at North Fork, but was “unsuccessful in obtaining commercial production,” Kerr told Petroleum News.

The drilling results justified natural gas development, though.

Alongside four small independent partners — GMT Exploration Co., Dale Resources Alaska, Nerd Gas Co. and Jonah Gas Co. — Armstrong brought the field online in 2011.

The North Fork unit currently produces between 2.5 million cubic feet and 10 million cubic feet per day, depending on the season and the market needs, according to Kerr.

The four wells at North Fork currently produce from six separate Tyonek sandstones, according to Alaska Division of Oil and Gas information. The most productive well, accounting for almost half of cumulative production, remains the NFU No. 41-35.

The NFU No. 41-35 produces from the Tyonek 8000 and Tyonek 8500 sands.

As it begins testing additional zones in the Tyonek, Armstrong is propelled by two recent developments at the North Fork unit: one technical and one administrative.

Armstrong recently shot 3-D seismic that “greatly improved the regional structural definition of the four-way anticlinal North Fork closure,” according to state filings.

The trick at North Fork is to find productive patches within the sandstones.

“Depositionally, these are lenticular sands, so they come and go,” Kerr told Petroleum News, referring to layers of sands and mud. “We’re drilling through a package of sands.”

Additionally, and in part because of the seismic results, the state recently agreed to expand the North Fork unit and its Gas Pool No. 1 participating area to the west.

Regional development efforts

The North Fork unit could become increasingly important as an anchor development for the southern Kenai Peninsula, a region with many known but undeveloped prospects.

North Fork is now the southern terminus of the regional natural gas system.

Through their midstream subsidiary Anchor Point Energy LLC, Armstrong and its partners built the 7.4-mile North Fork Pipeline from the unit to the coastal community of Anchor Point. The North Fork Pipeline connects to the Anchor Point Pipeline, which Enstar built to connect to the southern terminus of the Kenai Kachemak Pipeline.

North Fork also kick started long running efforts to bring natural gas to Homer.

After local communities agreed to shoulder around a quarter of the roughly $11 million project, state policymakers approved an $8.15 million allocation in the fiscal year 2013 capital budget for a transmission line to Anchor Point, Homer and Kachemak City. And through a separate grant, the state funded a pipeline into the tiny village of Nikolaevsk.

Additionally, North Fork is making it easier for other leaseholders in the area.

The Enstar affiliate Alaska Pipeline Co. recently announced plans to build a 10-mile pipeline to the Red pad at the Hilcorp-operated Nikolaevsk unit, northeast of North Fork.

The $8.4 million Red Pad Pipeline would connect to the Anchor Point Pipeline.

Union Oil Company of California discovered natural gas at the unit in 2004 with the Red No. 1 well, but said inadequate pipeline infrastructure kept it from developing the field.

Although lease expirations recently shuffled the deck in the area, other large leaseholders in the southern Kenai Peninsula include Buccaneer Energy Ltd. and Apache Corp.

Another North Slope match

Concurrent to these efforts, Armstrong also returned to the North Slope in 2008.

Through a new affiliate called 70 & 148 LLC — named, in a cosmic bid for good fortune, after the coordinates of Prudhoe Bay — Armstrong acquired leases around its original acquisition in 2001: northeast, northwest and south of Kuparuk. In 2009, Armstrong further expanded its leasehold in northern Alaska. For a time, Armstrong and its affiliates held the distinction of having the largest portfolio of state leases.

As it had done before, Armstrong found a partner to help it explore this acreage.

Along with fellow Denver independent GMT Exploration, Armstrong brought the Spanish super major Repsol YPF on board in March 2011. Through their agreement, Repsol acquired a 70 percent interest in 494,211 acres across the North Slope and planned to spend around $768 million, with the vast majority going toward exploration.

Although a gas kick and other challenges forced Repsol to downgrade its five-well program to a two-well effort in 2012, the company plans to drill three wells this winter.

As it works alongside Repsol, Armstrong is also keeping an eye on its other interests in the region. Kerr previously told Petroleum News that Armstrong has “more than a dozen ideas outside of existing producing units” it hopes to drill and test in the coming years.

In some cases, “we know the oil is in place,” Kerr said.

Asked in September how potential partners viewed the investment climate in Alaska, Kerr said, “Alaska continues to be on the forefront of many oil companies’ minds. We believe that it will take a modification of the current (Alaska’s Clear and Equitable Share) tax law on the North Slope to create the interest in Alaska that many hope for.”

While that opinion is ubiquitous among industry, it remains a point of debate among the lawmakers ultimately responsible for approving any modifications to this tax code. They have been debating potential revisions for years, but have yet to make any major changes.

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