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Vol. 12, No. 37 Week of September 16, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Back in the game

Bill Armstrong team returns to Alaska, this time in the Cook Inlet basin

Kay Cashman

Petroleum News

The independent responsible for bringing three new oil companies to Alaska’s North Slope in 2002-05 is back in the state — this time in Southcentral Alaska’s Cook Inlet basin. A newly formed, local affiliate of Denver-based Armstrong Oil and Gas, Armstrong Cook Inlet LLC, has taken over as operator of the North Fork gas unit from Gas-Pro LLC. Leases in, and near, the southern Kenai Peninsula unit have also been transferred to Armstrong CI, a State of Alaska official told Petroleum News Sept. 10.

What’s more, the top executive of all the Armstrong companies, Bill Armstrong, said the North Fork deal is just the first of possibly several more to come.

“We are looking to get active in the Cook Inlet,” Armstrong said. “We think it’s a good time to explore for gas in the Cook Inlet. … So we made our first acquisition, and plan on working with other landowners in the Cook Inlet basin. We’re looking forward to doing more deals. … Assuming we’re successful, we’ll be doing what was typical for us on the North Slope — a combination of wildcat and development drilling.”

“To date most of the Cook Inlet basin explorers have been looking almost exclusively for structures. We’ll be looking for typical structures, stratigraphic traps and a combination of both. … As long as people are willing to work with us, we’ll be very busy,” Armstrong said, noting that state and local officials had been very helpful in Armstrong Alaska LLC’s exploration and development work on the North Slope.

Initially Armstrong CI will be working onshore. “We haven’t decided yet about offshore,” Armstrong said.

The Armstrong CI team will remain “essentially” the same, he said. The company’s North Slope team included Ed Kerr, Stu Gustafson and Matt Furin.

Pursuing aggressive development

Armstrong CI amended North Fork’s 42nd plan of development to pursue what it describes as “aggressive” development of the nonproducing unit’s natural gas. The amended plan includes drilling a 9,000-foot Tyonek delineation well by March 31, 2008.

Kevin Banks, acting Division of Oil and Gas director, recently approved the amended plan, but said the 43rd plan of development for North Fork would be due by Jan. 1, 2008, which is about 90 days before the 42nd plan expires.

Under the original 42nd plan of development Gas-Pro was to put the existing North Fork gas well into production by Sept. 1, 2007. (The predecessor to Chevron, Standard Oil of California, drilled that discovery well, the North Fork 41-35, in 1965 while searching for oil.)

In a letter last month to the division, Armstrong Vice President Ed Kerr said related permitting and construction had not been done by Gas-Pro to meet the Sept. 1 deadline.

In exchange for putting the existing well into production right away, Armstrong CI proposed to drill a second delineation well in the spring, which Kerr said was needed to evaluate the Tyonek reservoir and insure “continuous uninterruptible commercial gas production.”

Kerr said the “dominant theme” in Gas-Pro’s plan of development was “to continue to look for gas markets and attempt to initiate sales of gas via trucking compressed natural gas and offloading said gas into the KKPL pipeline for sales.” While Kerr conceded Gas-Pro’s plan was “a valid option,” he told the state that Armstrong CI did not think it was “the most efficient manner” to bring the North Fork unit into production because the plan did not propose to drill a second well in the unit.

Kerr also expressed concerned with the “potential liability associated with trucking compressed natural gas on Alaska highways,” and with the fact that the process would “always be on an interruptible basis.”

Talking to Enstar, Chugach, Agrium

Kerr said Armstrong CI has already begun discussing gas sales with area users, including “Enstar, Chugach and the Agrium plant.” Those discussions have lead Armstrong CI to believe it will have a market for its gas once a pipeline is in place, he said.

“Enstar has stressed their need for gas moving forward beginning almost immediately and including very substantial volumes in the year 2010 and later,” Kerr said. “Agrium has stated that they have a consistent need for gas while their plant is in use, which to date has been the ‘off peak’ months primarily in the summer. Chugach has also stated their need for gas both now and in the future.”

Working to build a line to KKPL

Armstrong is also working on an “agreement in principle” with Enstar to build a 15-mile pipeline from North Fork’s existing gas well to the KKPL, provided Armstrong is able to “drill and test a reasonable amount of gas out of the delineation well,” Kerr told the state. KKPL is the most southerly gas pipeline on the Kenai Peninsula.

Kerr pointed out that no one has been able to persuade Enstar or any other party to construct a pipeline to the North Fork unit, largely because there is only one well in the unit.

“We are confident,” Kerr wrote, “that after the drilling of the delineation well, we will have adequate reserves to warrant the building of a pipeline” to the North Fork unit. But if Enstar is not willing to build the pipeline, Kerr told the state Armstrong CI would be willing to conduct its own feasibility for building the pipeline.

In 2003, NorthStar Energy, which owns Gas-Pro, struck a deal with Enstar to supply gas from North Fork to Homer on the southern tip of the Kenai Peninsula. The deal involved Alliance Energy, a sister company to NorthStar, building a pipeline from North Fork to Anchor Point, northwest of Homer, and Enstar building a pipeline from Anchor Point to Homer, a total distance of 10-11 miles.

However, both Enstar and the Regulatory Commission of Alaska required that pipeline construction be contingent on drilling a second North Fork well, to raise proved reserves in the field from 12 billion cubic feet to 14.5 bcf, which would ensure a 20-year gas supply for Homer.

Gas-Pro never drilled the second well.

Armstrong’s paperwork did not mention a gas line to Homer, but in July 2006 NorthStar informed Enstar that it could not meet the terms of the Homer gas supply contract.

In August 2006, Enstar told the Homer City Council that the company was considering building a high-pressure gas transmission line south from the end of the Kenai Kachemak Pipeline at Happy Valley to Homer. The new line would hook up to production from a known gas pool penetrated by the Red well in the Chevron-operated Nikolaevsk unit, close to North Fork. The line would cost about $16 million and take about four years to complete, Enstar said, which matches the 2010 date Enstar gave Armstrong.

In parallel with the construction of the gas transmission line, Enstar said it would start building out a gas distribution network centered on Homer, at an estimated cost of $14 million, to serve an estimated 3,000 customers in the Homer area.

Kerr says more wells, other projects to come

In its arguments to the state for amending North Fork’s 42nd plan of development, Kerr said pointed out that there had been “no real exploration or development activity” in the North Fork unit or surrounding area for about 40 years, largely because of a lack of infrastructure (no pipeline) and a lack of a market for the gas.

The “first order of business,” Kerr said, is to get the delineation well drilled and a pipeline to KKPL built. “We can then prepare for the drilling and development of subsequent wells in order to fully develop the North Fork unit and any surrounding leases.”

In the section of his letter dealing with Armstrong CI’s long-term plans, Kerr said North Fork was the first step for Armstrong CI “playing a larger part in providing natural gas to Southcentral Alaska.”

He said he wasn’t leaving

The three companies Armstrong Alaska brought to the North Slope in 2002-05 were Pioneer Natural Resources, Kerr-McGee and Eni Petroleum. Both the North Slope Oooguruk and Nikaitchuq discoveries were prospects Armstrong had identified, started permitting, and then helped drill and apply for development permits when Pioneer and Kerr-McGee, respectively, came in as majority partners and took over operatorship.

At the time Armstrong sold out its remaining North Slope assets to Eni, Bill Armstrong said, “We’re definitely not leaving Alaska.” He said the company would stay in the state and continue to put together exploration prospects, although at that time Armstrong’s focus was still on the North Slope.

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