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Vol. 16, No. 21 Week of May 22, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Redoubt start-up close; CIE to drill up to 6 inlet gas prospects

By the time this edition of Petroleum News hits the Web on May 20, Cook Inlet Energy will either have oil production restored from the Osprey platform’s Redoubt Shoal field, or be within days of doing so. (Knock on wood.)

Depending on results from 3-D seismic analysis, the Alaska independent is also preparing to explore as many as six natural gas prospects on the west side of Cook Inlet with its newly secured Rig 34.

Cook Inlet Energy, or CIE, got the truck-mounted Atlas Copco RD20 drilling rig from its parent company in Tennessee and has been retrofitting and winterizing it for about two months. Rig 34, which should be ready for service by the end of June, has a maximum drilling depth of about 6,500 feet and is expected to cost the company $600,000 to $800,000 for transportation and refurbishing, CIE Chief Executive Officer David Hall told Petroleum News in mid-May.

Redoubt target 2,000 barrels a day

The newest and southernmost platform in Cook Inlet, in mid-2009 the Osprey was producing roughly 20 barrels of oil per day from Redoubt Shoal when it was shut-in because the previous owner, Pacific Energy Resources, had filed bankruptcy and could no longer afford to operate its Cook Inlet oil and gas fields and facilities.

CIE acquired most of Pacific Energy’s Alaska assets in December 2009; almost all of those same assets had been purchased by Pacific Energy from Forest Oil in 2007 for $464 million.

CIE immediately set about to restore production from its Cook Inlet basin wells, starting with 930 gross barrels of oil equivalent per day from the West McArthur River oil field and the West Foreland gas field. One of those wells was the West McArthur River unit 2A, shut-in since 2001. CIE brought it back online for use as an enhanced oil recovery well for a pilot waterflood program at West McArthur that is expected to increase oil recovery rates in the field.

That production, along with small percentages of ownership in fields operated by other operators, brought the company’s total net production to a little over 1,000 barrels of oil equivalent a day, Hall said recently.

CIE’s production target for Redoubt after completion of phases 1 and 2 in its May 2011 through April 2012 State of Alaska-approved development plan is 2,000-plus barrels of oil a day.

The company brought in a CUDD hydraulic snubbing unit that is currently being used in the first phase of work on the Osprey, which includes bringing Redoubt unit 1 and 7 wells back online to reestablish oil production from the central fault block of the Hemlock participating area, as well as reactivating RU 6 well for waterflood support. Electric submersible pumps at RU wells 1 and 7 have also been replaced.

The snubbing unit was also used on the Kustatan field lease well, KF I, which is a gas producer. The onshore Kustatan facility processes oil from the Redoubt field and supplies the Osprey platform with power.

Buying a dedicated rig for Osprey

Purchasing a dedicated drilling rig for Osprey is another commitment CIE made for phase 1 of its current development plan, and then demobilizing the snubbing unit in preparation for phase 2 work, which was initially targeted to get under way this summer.

There were a total of six producers drilled into Redoubt from the Osprey platform; the final four producers all require re-drilling in sections.

In phase 2, redrills of the wells in the central and southern fault blocks will be done with the new rig, including reentering and recompleting RU 3 as a gas well. (If successful, CIE would have to apply with the state for a natural gas participating area.)

The timing of phase 2, however, is dependent on the company raising an additional $30 million in outside financing, which CIE’s parent company is confident it can do.

“We are still working on the timing of phase of 2, but hope it will be this year,” Hall told PN in an email.

Once its financing is in place, the company will have to buy a rig for the platform, possibly do a rebuild and move it to the Osprey.

CIE’s long-term plans for the Redoubt unit include drilling brand new, grass roots wells in the some or all of the 13 remaining slots on the Osprey platform, the timing of which would likely be in 2012 or beyond, per state records.

According to public records, CIE’s capital expenditures for reworking wells and refurbishing Rig 34 have been nearly $18 million to date.

Drilling up to six new gas prospects

The six undeveloped prospects and leads that CIE is planning to begin drilling as early as this summer with Rig 34 include Tutna, Tazlina, Stingray, North Alexander, Olsen Creek and Otter.

The company is currently analyzing 3-D seismic over those plays and is in the process of renewing its Oil Discharge Prevention and Contingency Plan with Alaska’s Department of Environmental Conservation. The C plan is anchored with the Tutna prospect, but will cover all six prospects, Hall said.

The C Plan closed for public comment on May 16 and one of the six prospects, Stingray, already has almost all its permits.

Will likely use jack-up

Buccaneer Energy prepared a list of wells its rig company might be able to drill with a jack-up that it intends to purchase with the help of the Alaska Industrial Development and Export Authority, or AIDEA. The list includes three wells on leases operated by CIE.

When asked if CIE has a deal with Escopeta Oil, which already has a jack-up on the way to Cook Inlet, or Buccaneer, which AIDEA now says won’t have a jack-up in the inlet until 2012, Hall said in an email, “We’re very excited about a jack-up(s) coming to the Cook Inlet soon, but currently we do not have anything teed up with either one of the companies. However, we have a number of offshore projects suitable for development with use of a jack-up rig such as Sabre, and the North and South extents of the Redoubt field.”

CIE talked to AIDEA about financing its rig for the Osprey platform, but was told the state agency was too busy with Buccaneer to explore other financial investments.

Background on the deal

Pacific Energy filed bankruptcy in part because of a steep slide in oil prices and an eruption of Redoubt volcano that interrupted oil production on the west side of Cook Inlet, making matters worse for operators in the area. But it also ran into unexpected problems such as getting approval as an operator by the state, which meant it had to pay Forest a reportedly high price for operating for six months. It also ran into expensive production problems at Redoubt and high joint interest billings from Chevron-operated properties when Chevron temporarily ramped up drilling in the Cook Inlet basin.

Two of the three founding partners of CIE, including Chief Executive Officer David M. Hall, President Walter J. Wilcox II, had worked for one or both of the previous owners of the CIE properties, Pacific Energy and Forest Oil. CIE Chief Financial Officer Troy Stafford had not.

CIE was formed in January 2009 with the express purpose of buying most of Pacific Energy’s Alaska assets.

The company secured the right to buy the properties by submitting the top bid of $2.25 million at an auction Pacific Energy held in early November 2009.

The purchase price, however, wasn’t the full cost of acquiring the Pacific Energy assets. CIE had to cure claims and post bonds to satisfy government and landowner requirements, such as the $511,000 in unpaid royalties to the U.S. government in connection with West Foreland.

When the sale closed in late 2009, CIE set about rehiring many of the employees who had lost their jobs due to the shutdowns.

In its 2010 annual report, Miller said it had acquired 100 percent of the membership interests in the Alaska limited liability company from Hall, Wilcox and Stafford, setting the value of CIE’s assets at $875 million at the time of the acquisition.

Each of the sellers received four year stock warrants to purchase 3.5 million shares of Miller common stock at exercise prices ranging from a penny to $2 per share. In addition, Miller was required to pay $250,000 in cash for expense reimbursement to the three sellers.

Miller also said that each of the sellers “would continue their employment” with CIE for “at least three years from the closing date of the transaction at their specifically defined compensation and benefit levels.”

In addition, Hall was appointed to Miller’s board of directors and named chief executive officer of CIE.

Prior to April 30, 2010, Stafford “left the employ” of CIE, the annual report said.

Until it acquired CIE, Miller’s oil and gas activities were focused on the Appalachian basin, including the Chattanooga shale.

Such a deal for Miller

When it announced its acquisition of Cook Inlet Energy in October 2009, Miller Petroleum’s Chief Executive Officer Scott M. Boruff said, “We hit it out of the park on this one.”

Why? Because before its interest in Alaska’s Cook Inlet was announced, Miller Petroleum stock traded on the Nasdaq stock exchange for about 20 cents a share. Its most recent annual report at the time, for fiscal year ending April 30, 2009, said the company had total revenues of $1.57 million and proved oil reserves of 53,443 barrels. Its market capitalization was $3.66 million.

Recently the Tennessee independent began trading on the New York Stock Exchange, using its new name, Miller Energy Resources Inc. Its stock closed the first day, April 13, at $6.11, eventually peaking at $7.21 a share.

Miller’s annual report for FY 2010 which ended April 30, said the independent had total revenues of $5.87 million and proved oil and gas reserves of 11.3 million barrels of oil equivalent. Its market capitalization had increased to $156.32 million.

On May 19 Miller stock opened at $5.50.

—Kay Cashman

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