In some ways, the future of the Umiat oil field has never been more certain.
Having completed the first flow test at the field in decades, the Australian independent Linc Energy Ltd. is currently compiling information for an environmental impact statement, which the company will need before it can develop the North Slope field.
In other ways, though, the future of the field has never been more uncertain.
Linc has yet to announce whether it intends to develop the field independently, bring on a joint venture partner or sell the field to an interested third party. The current stretch of low oil prices further complicates a remote and technically challenging project. And a recent decision by the state to abandon plans for a road to the isolated region in the foothills of the Brooks Range Mountains have made an expensive project even costlier.
While those decisions and evaluations continue, Linc is also moving forward on exploration drilling for a potential underground coal gasification program in Cook Inlet.
Early gas exploration
When Linc Energy acquired 123,000 acres in the Cook Inlet region from San Francisco-based GeoPetro Resources in March 2010, the company saw the potential to use conventional gas production to finance unconventional exploration and development.
The acreage was split between two blocks - one near Point MacKenzie along the western bank of Knik Arm and the other at Trading Bay on the west side of Cook Inlet.
By that summer, Linc was already moving forward on a well in the Point MacKenzie region, building on rudimentary permitting and infrastructure work from GeoPetro. The goal was to bring the Point MacKenzie acreage into production quickly and proceed to an exploration and development program at the Trading Bay acreage in the near future.
Using pre-existing seismic information and a handful of previous exploration wells going back to the 1960s, Linc drilled the 6,323-foot LEA No. 1 well in October 2010.
The well encountered “a number of gas bearing horizons” and “a number of significant coal seams,” the company announced in November. But, after additional testing, Linc decided the structure was “too tight” to be developed without “swabbing” the well with large amounts of formation water. “The conclusion from the testing is that although gas is trapped within the coal, there is not sufficient natural fracturing in the coal to allow for the recovery of commercial quantities of gas,” the company said. While “disappointed,” CEO Peter Bond expressed optimism in Alaska, calling exploration “a numbers game,” adding, “the more smart wells you drill the more likely you are going to be successful.”
The expiration of much of the initial lease acquisition, in 2012, more or less eliminated the possibility of pursuing Cook Inlet gas without acquiring additional leases elsewhere.
Umiat obstacles
By that time, though, Linc was already pursuing a much bigger project.
In June 2011, the company acquired Renaissance Alaska LLC for some $50 million. The small independent company held an 84.5 percent interest in Renaissance Umiat LLC, which owned the main leases at the Umiat oil field. The deal gave Linc some 19,358 gross acres over two federal leases and one state lease straddling the Colville River.
The Umiat oil field is among the largest known yet undeveloped oil fields in Alaska. The U.S. Navy discovered the field in 1946, during an exploration campaign in the National Petroleum Reserve-Alaska to find more domestic oil supplies following World War II.
Even though early resource estimates were high, the initial exploration campaign encountered two obstacles that still present challenges for developing the field.
The first was isolation.
Developing the field would likely require standalone processing facilities and a 100-mile road and pipeline bundle to reach the Dalton Highway and trans-Alaska oil pipeline.
Eager to spur resource development in the region, then-Gov. Frank Murkowski proposed a state-sponsored road to Umiat as part of his Roads to Resources program. Preliminary permitting efforts on the project continued under the Palin and Parnell administrations.
The project came under political pressure from Native groups concerned about impacts to subsistence activities in the region and politicians concerned about “corporate welfare.”
In mid-2013, the Alaska Department of Transportation and Public Facilities backed away from the project. The U.S. Army Corps of Engineers closed the project in January 2015.
Although Linc was certainly in favor of the state footing the bill for the expensive project, the company always said the Umiat field would be economic regardless.
The second obstacle was geology.
The unusually shallow reservoir at Umiat is partially embedded in permafrost, which reduces reservoir pressure and complicates efforts to produce from oil-bearing rocks.
“Behavior of the wells during testing was unpredictable,” U.S. Bureau of Mines petroleum engineer Oren C. Baptist wrote in a 1960 study of 11 U.S. Navy wells drilled at Umiat between 1945 and 1952. “For example, one well was abandoned as a dry hole after all tests failed to recover any oil, yet an offset well, only 200 feet from the dry hole, produced 400 barrels of oil a day.” He hypothesized that drilling mud had thawed the permafrost, allowing water into the formation, which froze the sand and plugged the well.
The U.S. Navy returned to Umiat in 1979 to drill Seabee No. 1, a deeper test well in the vicinity. That was the last exploration work conducted in the region for nearly 30 years.
Those obstacles, although formidable, seemed surmountable by 2001, when Colorado-based independent Arctic Falcon Exploration acquired the Umiat leases from a sister company. Through a series of deals, Renaissance Alaska LLC and Rutter and Wilbanks Corp. acquired a stake in the leases in 2007, and created Renaissance Umiat LLC.
A combination of historically high oil prices and 70 years of advances in drilling technologies made the companies believe they could economically develop the field.
Ambitions and setbacks
Ultimately, they handed the task over to Linc Energy in mid-2011
The four years since have proceeded in bursts.
In early 2012, “logistical and weather issues,” including “low snow levels which affected snow road development,” forced the company to defer a five-well exploration program in the region. By August, Linc had announced an “aggressive timeline” to bring Umiat into production in five to seven years, estimating peak production of 50,000 barrels per day.
In early 2013, light snowfall combined with extreme cold snaps once again delayed exploration. Instead of a four-to-five well program with a pair of side-by-side wells designed to directly compare completions from vertical and horizontal wells, Linc was forced to scale back the program to two wells: Umiat No. 18 and Umiat No. 23H.
The limited program would still allow the company to meet its “key objectives” for the season: providing a side-by-side comparison and searching for a deep gas supply.
Umiat No. 18 collected 300 feet of core and encountered 100 feet of net oil pay in the Lower Grandstand, but mechanical problems prevented a flow test. After attempts to clear the blockage were unsuccessful, Linc suspended operations for the season. The company cold stacked the Kuukpik No. 5 rig at the permanent Seabee drilling pad in order to get a head start on drilling in early 2014 and avoid more weather-related delays.
Technical breakthrough
The limited program yielded important technical information.
To avoid thawing permafrost, Linc used a chilled mineral oil based mud system for drilling and a “progressive cavity pump” for its flow test “in order to prevent heat in the borehole from establishing a ‘thaw bubble’ in the permafrost and potentially destabilizing the well bore and surface facilities,” said Linc President of Oil and Gas Operation Scott Broussard. “We were also careful to make sure that the pump was below the perforated zone in order to make sure that heat was not introduced at the perforated zone,” he added.
Even so, Linc said it intended to use an open-hole completion technique on future wells, as the U.S. Navy had at its original wells at the field. By drilling without casing or lining, an open-hole technique allows fluids from a reservoir to flow directly into a well bore.
A subsequent analysis of Umiat No. 18 rock samples gave the company considerable optimism about the quality of the Lower Grandstand formation, which Bond described as being “completely saturated with hydrocarbons.” The company cancelled the Umiat No. 18 flow test in favor of drilling a horizontal well at the field as quickly as possible.
Even so, Linc eased slightly from its timeline for the project. The company had initially said it intended to bring Umiat online by late 2017. By October 2013, the company was saying it “plans to aggressively develop this field once commerciality is determined.”
In early 2014, Linc drilled the Umiat No. 23H well to target depth of 4,100 feet, the first horizontal well at the field. A subsequent flow test produced a sustained rate of 250 barrels per day - or 650 barrels total during four flow tests over a seven-day period at the field - and a peak rate of 800 bpd, according to the company. The company estimated the well would have produced as much as 2,000 bpd with a gas drive installed.
On-site analysis suggested that the well produced light, sweet 38.5-degree API oil with no water. Linc said it intended to perform more in-depth analyses in a laboratory setting.
The flow test also proved the efficacy of the completion method the company had proposed during its work on Umiat No. 18. “We have now proved that the oil flows easily from the Umiat reservoir with very good permeability and that the drilling process of utilizing horizontal wells with slotted liners with ESP down well pumps as per our commercial design has been a success,” Bond said. “And with this success and the knowledge gained from last year’s drilling program, Linc Energy now has clear a path for the commercial development of the billion barrel (original oil in place) Umiat field.”
How to develop
Given the daunting size and isolation of Umiat, Linc began studying the best way to proceed with such a development - from both a corporate and a technical standpoint.
In September 2014, Linc said it had received “unsolicited expressions of interest” to sell the Umiat field and conventional assets in Wyoming. In response, Linc launched “a formal process to work with additional parties who have expressed an interest in the potential acquisition of the company’s entire USA based oil and gas portfolio.”
“There is no assurance that these activities will result in a formal offer or binding arrangement,” the company warned, noting that any sale of “core assets” would require the approval of shareholders. Bond added a cautiously optimistic note: “It is early days on the oil asset negotiations but it is always nice to receive unsolicited approaches on our assets that reconfirm the underlying value and provide third party validation. We will work with the parties and update the market if we can agree final and binding terms.”
Linc initially expected to make a decision by the end of 2014. Those efforts have gone more slowly than expected. In an early 2015 financial statement for the second half of 2014, Linc said it “continues to engage with these parties in confidential negotiations while continuing to progress its permitting and development plans for the field.”
The company has given no reason for the delay. One mitigating circumstance might be executive. In late 2014, Bond stepped down to become executive chairman of the board and general counsel. Company secretary Craig Ricato moved into the leadership position.
Soon thereafter, in an annual report, Linc said it had wrapped up the “select engineering” for a potential Umiat development. That first phase “identifies and analyses road options, pipeline routes, and environmental assessments of various development options.” The report estimated that an initial development program could include as many as 70 wells.
The current phase involves incorporating the results of the flow test into a reservoir simulation model, collecting additional information for a future environmental impact statement and deciding whether it needed to bring on a partner to assist with development.
The third phase involves completing the environmental impact statement, choosing a development scenario, building infrastructure and figuring out project financing.
Still pursuing UCG
Even though the company has been more public about its efforts at Umiat, Linc Energy has also been quietly appraising the feasibility of developing deep coal deposits.
Coal gasification is a relatively common industrial process. Linc is pursuing “underground coal gasification,” which involves igniting underground coal deposits and injecting air and water into the seams. The mixture of heat and oxygen converts the carbon in the coal into methane, which is the primary ingredient in natural gas.
Early on, Linc envisioned a three-phase program: a single gasifier on a 90-day trial monitored for one year, a panel of three to six gasifiers on a one year trial and finally a working underground coal gasification project combined with surface gas-to-liquids technology to produce some 20,000 barrels per day of various synthetic diesel products.
In February 2011, the Alaska Mental Health Trust Land Office gave Linc an underground coal gasification exploration license over 181,414 acres. The license covered three contiguous areas: on the east side of Cook Inlet near Nikiski, on the west side of Cook Inlet near the Beluga Power Plant and in the Interior region around Healy and Nenana.
Linc drilled the TYEX01 well in late 2011 and the associated TYEX01X well in early 2012 in the Tyonek area. The 1,450-foot stratigraphic core hole targeted coal seams previously encountered in the nearby Phillips Petroleum North Tyonek State 58848 No. 1 well from 1973 and the nearby Superior Oil Three Mile Creek No. 1 well from 1967.
The company called the results of the core hole “very encouraging.”
In 2011 and 2012, Linc acquired 2-D seismic over all three exploration license areas.
Using a custom rotary-core rig from Buffalo Custom Manufacturing, Linc drilled the KEEX02 well on the west side of Cook Inlet in 2012. After delays caused by inclement weather, Linc completed the 1,700-foot hole in December 2012, according to the state.
In mid-2014, after taking a year off from drilling, the company began permitting a five-well exploration program on its two exploration license areas on the west side of Cook Inlet. The company planned to drill the first well in the program - TYEX02 - in 2014.
“The main objectives of the TYEX02 core hole are to provide confirmation of the geological structure, provide geotechnical information about the coal seams and surrounding rock, provide gas content and whole coal analysis of the two prospective target coal seams, obtain hydrological characteristics from geophysical logs and perform drill stem tests in and adjacent to the targeted coal seams,” Linc said in its application.
According to state records, the company completed the TYEX02XX well last year. The results of that well will determine whether Linc drills the TYEX03 well nearby.
Now, the company is considering marketing options. This year, the company expects to finalize a commercial pathway for a proposed synthesized natural gas hub in the region and to enter “several supplier agreements” to provide both synthesized natural gas and carbon dioxide. The company estimates there is 35 billion cubic feet of local demand for synthesized natural gas in the region “with the potential for export in the form of liquefied natural gas further increasing demand,” the company said in October 2014.
