The state has certified Kitchen Lights Unit No. 3 as a discovery well.
With a Sept. 16 decision from Division of Oil and Gas Director Corri Feige, the exploration well became the official discovery well for four previously undiscovered natural gas pools in the Cook Inlet basin. Now, operator Furie Operating Alaska LLC and its working interest owners will pay a reduced royalty rate on production from the well.
Under the new scheme, the companies will pay a 5 percent royalty rate for all natural gas produced at lease ADL 389197 from those four previously undiscovered pools, rather than the traditional 12.5 percent royalty rate. The decision begins retroactive to June 30, 2013 (at 7 p.m., Alaska Standard Time, to be specific) and runs through June 29, 2023.
The determination is a three-step process: Are the pools really pools? Are those pools really undiscovered? Are the pools really capable of producing in paying quantities?
In its July 30, 2013, discovery statement, Furie claimed that the KLU No. 3 well had encountered 29 horizons in the Sterling and Beluga formations that the company believed to be previously undiscovered gas pools. Of those 29 potential horizons, the company said that it had conducted modular formation dynamic testing on 28 and flow tests on six.
When state officials reviewed a Schlumberger report attached to the discovery statement, they found “no evidence of MDT or flow testing” for 10 of those horizons and eliminated those 10 from consideration. Even if the testing had occurred, the state determined that only a flow test could conclusively define a “gas pool” as required under state regulations.
Only flow tests considered
Of the six horizons that Furie flow tested, the state found two to be “water-bearing, not an accumulation of oil or gas.” The four remaining horizons met the definition of a “pool.”
They are: Horizon 6 in the Sterling from 4,190 feet to 4,225 feet, Horizon 25 in the Beluga from 5,941 feet to 5,959 feet, Horizon 26 in the Beluga from 5,999 feet to 6,005 feet and Horizon 28 from 6,964 feet to 6,998 feet, using measured depths in the well.
While those four pools may have been encountered by previous wells, the state determined that “no credible well tests were found to have been performed on those horizons in any surrounding well,” which meets the standard for “undiscovered.”
Using third-party reserve estimates and projected natural gas prices, the state determined that the natural gas contained in the four pools would be commercial viable.
The state originally provided a lower royalty rate for discovery wells but repealed the reduction in 1969, after the discovery of the Prudhoe Bay field. The state re-instated the reduction through the Cook Inlet Discovery Royalty program enacted in 1996 and 1997.
The KLU No. 3 exploration well was drilled into the Corsair structure, which had been penetrated by seven prior exploration wells, according to the Division of Oil and Gas.
Of those seven wells, four encountered gas-bearing intervals: State SRS No.1 drilled by Shell in 1965, Tern A SRS No. 1 drilled by Phillips in 1982, South Cook Inlet State No. 2 drilled by ARCO in 1993 and Kitchen Lights Unit No.1 drilled by Furie in 2012.
In the most recent plan of development for the unit, from November 2014, Furie said that the KLU No. 3 well - drilled in 2013 - had produced 15.83 million cubic feet during a four-point test and that gas samples taken during the test were 99 percent methane.
After several years of drilling and several years of construction, Furie has said it expects to bring the Kitchen Lights unit into production from the KLU No. 3 well as soon as November 2015, in time to meet contractual commitments that begin in January 2016.
