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Vol. 22, No. 47 Week of November 19, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

The Producers 2017: Furie blames state for lack of drilling

Budgetary standoff and lack of tax credit funding prompt company to postpone Kitchen Lights work

Eric Lidji

For Petroleum News

After a summer of uncertainty at the Kitchen Lights unit, Furie Operating Alaska LLC recently blamed state fiscal policy for thwarting its drilling activities for this year.

The local independent planned to use the Randolph Yost jack-up rig this summer to complete the KLU No. A-1 well at the offshore unit in Cook Inlet. The development well was required to meet the terms of a gas supply agreement with Enstar Natural Gas Co. Inc.

In late September 2017, though, the utility asked state regulators to amend the terms of the contract, to give Furie until July 31, 2018, to complete the KLU No. A-1 well. For a time, Furie stayed silent about the status of the project and the possible reasons for delay.

But in a plan of development submitted to state officials in early October, the local independent blamed its lack of any new development or exploration drilling at Kitchen Lights this past year on “the lack of any meaningful appropriation to the oil and gas tax credit fund for the purchase of Alaska oil and gas production tax credit certificates.”

The Randolph Yost rig was fully staffed for drilling operations at Kitchen Lights as early as April 2017, according to Furie. But the company had to delay the purchase of certain long-lead items pending the results of state budget negotiations over this past summer.

The ultimate decision to again underfund outstanding certificates meant that “Furie did not receive the funds it had relied on for its 2017 operations,” the company wrote.

In addition to the financial uncertainty, Furie blamed its inability to drill on the protracted budgetary standoff over the summer, which threatened to shut down government services.

Lawmakers passed a capital budget on July 27, two weeks after a tugboat required for operating the Randolph Yost rig went into dry dock and left for Singapore on July 13.

Furie needed the anchor handling tugboat to set the jack-up rig in place. According to the company, no suitable replacement vessel could be found in Alaska. The Randolph Yost rig remained staffed until mid-August, when Furie learned that the boat would not return until October, just before the end of the open-water drilling season in the Cook Inlet.

An alternate plan to bring a replacement vessel from the Gulf of Mexico proved to be too expensive and time-consuming in the time remaining, leading Furie to cancel its program.

“In sum, the lack of a timely resolution regarding funding for DOR to purchase tax credits delayed operations until the anchor handling tug boat was no longer available, and it was not returning to Alaska until the very end of the drilling season,” Furie wrote.

The two previous gubernatorial vetoes that cut funding for buying tax credits “created significant uncertainty for investors, making it harder and more expensive for Furie and other small, independent producers to secure crucial funds needed for drilling and completion programs” and “essentially gutted Furie’s sourced budgeted funds for 2016.”

“Furie has invested hundreds of millions of dollars in exploring and developing the KLU (Kitchen Lights unit) and has a very substantial amount of tax credit certificates in the queue awaiting purchase by the state,” the company wrote in its plan. “These certificates are a key component to funding further exploration and development activities in the KLU and were relied on by Furie when putting together its work program and budget.”

Upcoming plans

The Kitchen Lights unit is currently producing from two wells: the initial KLU No. 3 discovery well drilled in late 2015 and the KLU No. A-2A well drilled in 2016.

Furie began drilling the KLU No. A-1 well last year and planned to finish this year.

As part of its work this year, Furie removed a Composite Bridge-Plug Setting Tool from KLU No. 3, allowing the well to produce from both the Beluga and Sterling formations.

For the coming year, Furie is proposing a two-well program.

The company first intends to complete the KLU No. A-1 well “if advisable based on logs, data and market conditions” and then plans to drill a new development well at the unit.

The new development well would also be in the Corsair block - one of four exploration blocks at the unit and the site of all current development. The new well would target a Sterling interval from 6,964 feet to 6,998 feet measured depth in the KLU No. 3 well, “unless interpretations from the shallower data in a well indicate that producible hydrocarbons are unlikely to be found by drilling to that equivalent horizon depth.”

Alternately, the company said it might postpone the development well in favor of drilling a new exploration well or re-entering and deepening the existing KLU No. 4 well.

The company previously mentioned these two options - a new Sterling development well or an exploration program - in an amended plan of development submitted May 2017.

In its plan, Furie also referenced its earlier exploration plan, which detailed proposed exploration well locations throughout the unit on a timeline between now and 2021.

Contracts

An increased flow rate test on the KLU No. 3 and KLU No. A-2A wells in August 2017 produced at a combined rate of 31 million cubic feet per day, according to Furie.

The demands of the Enstar contract range from 10 million cubic feet to 22 million cubic feet per day. A contract with Homer Electric Association requires deliveries between 12 million to 18 million cubic feet of gas per day, depending on the time of year.

Earlier this year, the Regulatory Commission of Alaska approved a gas supply agreement between Furie and Chugach Electric Association Inc. The agreement included interruptible and firm supplies components. The interruptible supply began immediately.

The firm supply portion begins on April 1, 2023. It requires Chugach to purchase at least 5 million cubic feet of natural gas per day, totaling about 1.8 billion cubic feet per year. Starting in the seventh year of the contract, Chugach can purchase an additional 2 million cubic feet per day. Both parts of the gas supply agreement run through March 31, 2033.



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