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Vol. 19, No. 29 Week of July 20, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2014: Apache seeks long-term oil developments in Cook Inlet

The independent is in the early days of an exploration program it believes will unlock great resources

Eric Lidji

For Petroleum News

After Apache Corp. representatives attended a state-sponsored conference in Anchorage in early 2010, rumors began swirling in the oil patch about the future of the company.

The Houston-based independent had spent some $10 billion over the previous decade acquiring prospects around the world and was interested in extending the life of mature oil fields. Apache formed a local subsidiary - Apache Alaska Corp. - in May 2010.

The rumors went in many directions.

Escopeta Oil Co. confirmed that Apache made an offer to buy the offshore Kitchen Lights unit in the Cook Inlet, but the offer never led to a deal. At several points during the year, major news outlets reported that BP was in talks to sell the Prudhoe Bay field to Apache as part of a larger divestment campaign. Ultimately, Apache spent $7 billion on BP assets in Canada, Egypt and the Permian basin, but the deal bypassed Alaska. Later in the year, talk emerged that Apache was sniffing around Chevron’s Cook Inlet assets, but Chevron ultimately sold its Cook Inlet holdings to the independent company Hilcorp.

Finally, in late July, Apache said that it was acquiring 196,524 acres from Samuel H. Cade, Daniel K. Donkel and three other independent investors. The acreage was scattered across the entire Cook Inlet basin, and included both onshore and offshore tracts.

Apache claimed to be eager to expand its presence in the basin and soon backed up its claim. By October 2011, after dominating numerous lease sales and conducting some private deals, Apache claimed to hold some 800,000 acres across the Cook Inlet basin.

Over the past three years, Apache has lost a smattering of state acreage across its holdings as it relinquished some leases and others reached the end of their primary terms, but the company was the top bidder in the May 2014 Cook Inlet areawide lease sale.

The company primarily used the sale to bolster its existing holdings, Apache Alaska Government Relations Manager Lisa Parker told Petroleum News after the sale.

‘An oil museum’

While cognizant of the natural gas potential of the region, Apache said it came to Cook Inlet to pursue oil potential thought to have been passed over by previous operators.

Specifically, the company cited a U.S. Geological Survey estimating that nearly 1 billion barrels of oil remained in the Cook Inlet basin, waiting to be discovered.

“When you go up there, it’s kind of like going back into time. It’s like an oil museum, is kind of how I’d describe it,” Apache Vice President for Exploration and New Ventures John Bedingfield told analysts at June 2012 event. “It’s interesting, but things have just been frozen for 40-plus years.” To make the claim even more intriguing, Bedingfield added that Apache believed there was as much oil still to be discovered in the basin as has already been produced in the 55 years since the first discovery well in the region.

Following its strategy at the other mature basins - like the western desert of Egypt and the Forties field in the North Sea - Apache planned to start its tenure in Alaska by conduct a broad seismic survey in 2011 and drill an exploration well as early as 2012.

“It’s an exploration play but the guys have wowed me enough for me to believe that it’s a real opportunity,” CEO Steve Farris said during a conference call in August 2011.

Starting with seismic

In early 2011, Apache launched a small 2-D seismic survey.

The survey covered onshore targets up to 20,000-feet deep, offshore targets and “transition zone” targets. Apache ran a wireless nodal recorder alongside a conventional recorder to see whether the newer nodal technology worked it the Cook Inlet basin.

It worked, and Apache subsequently announced a three-year 3-D seismic survey.

The program covered acreage running north to the Susitna Flats and south to Anchor Point. The three-year timetable and the wireless technology allowed Apache to work year round: targeting onshore regions from September to April, offshore regions from April to November and transition zones from September to December and from March to May.

The survey began in late 2011 with an onshore program along the west side of Cook Inlet and provided information for determining future drilling locations. “We’re going to operate here for many, many years - we’re on a 25- to 30-year plan for the Cook Inlet,” Apache Senior Commercial Advisor Paul Abokhair told lawmakers in October 2011.

Echoing that sentiment, Apache Alaska General Manager John Hendrix told Petroleum News in June 2012 that the company wanted to be in Cook Inlet “30 years from now,” adding: “You don’t come in and buy this much acreage with a short-sighted plan. We’re not a one-well wonder and we don’t have to bet the farm on one well. … It’s a proven basin and we think it’s been underexplored. But it’s not an easy basin. It’s a very complex basin. It’s very complex to drill and it’s very complex from the geology (standpoint).”

Instead of focusing seismic around specific targets, Apache conducted a broad survey, which allowed it to connect new data with existing information about known fields and also to collect higher resolution images of the specific area it eventually plans to target.

The first 130 square miles of seismic indentified eight new leads, Bedingfield said in June 2012, suggesting as many as 650 potential leads spread across the leasehold.

Regulatory delays

As Apache prepared to move the survey into more fragile transition zones and offshore regions in early 2012, the National Marine Fisheries Service Alaska Region issued a favorable opinion about the proposed program, determining that it was “not likely to jeopardize the continued existence of the Cook Inlet beluga whale or Steller sea lion populations, nor to destroy or adversely modify Cook Inlet beluga whale critical habitat.”

Soon after, though, the Natural Resources Defense Council, the Center for Biological Diversity, the Center for Water Advocacy and the Native Village of Chickaloon challenged the finding, saying the survey warranted an environmental impact statement.

A May 2013 court order upheld a portion of the appeal, although by then the authorization had already expired. The parties ultimately agreed to close the case.

A delay in receiving a separate National Marine Fisheries Service authorization for a survey in the Kenai National Wildlife Refuge forced Apache to suspend its seismic program in September 2012, after collecting some 316 square miles of 3-D seismic.

“We shut down a $50 million seismic program and it cost Apache $10 million to do that,” Hendrix said in February 2013, saying the matter delayed the program by at least a year.

Even after Apache got its National Marine Fisheries Service permit, it kept the seismic program on hold while it financed other projects in its portfolio, New Ventures Exploration Manager David Allard told the Alaska Geological Society in March 2013.

“Like most independents, you live within your cash flow,” he said.

The U.S Fish and Wildlife Service issued a separate permit in July 2013 allowing Apache to use surface lands in the Kenai National Wildlife Refuge for its seismic program.

While those tensions remain, Apache took pride in earning the Chairman’s Stewardship Award from the Interstate Oil and Gas Compact Commission in November 2013.

Apache resumed its program in February 2014 and launched an onshore seismic survey in the Kenai National Wildlife Refuge in the northern end of the Kenai Peninsula.

Having received a National Marine Fisheries Service authorization for its 2014 program, Apache also began planning a survey in the area just offshore from the onshore program.

Early drilling uncertain

In April 2012, after completing its initial onshore 3-D seismic acquisition, Apache announced plans to drill two onshore wells during the second half of the year.

Apache envisioned drilling exploration wells as deep as 16,000 feet, which would allow the company to test beneath the Tertiary strata of the basin. “We don’t want anybody coming back behind us and saying ‘look what I’ve got,’” Hendrix told Petroleum News in June 2012. “You’re down there. You’re drilling. You might as well go the extra mile, or a thousand feet, or whatever it is.”

The program called for drilling the Aspen well on the west side of Cook Inlet in July 2012 and the Captain Boomer well on the west side of Cook Inlet in the fall of winter.

The Aspen well would be some four miles west of the village of Tyonek, near several previous exploration wells including the 4,485-foot Aspen No. 1 that Aurora Gas drilled in 2005, the 13,600-foot Tyonek Reserve No. 1 well that Humble Oil drilled in 1965 and the 10,852-foot Simpco East Moquawkie No. 1 well that Simasko drilled in 1979.

The Captain Boomer well would be four miles southwest of Moose Point, northeast of the 10,058-foot Moose Point Unit No. 1 well that Amarex Inc. drilled in early 1978.

Because its seismic acquisitions had been focused on the west side of Cook Inlet up to that point, Apache later decided to drill both wells on the west side during the fall. And as the season slowly progressed, Apache ultimately scaled the program back to one well.

Kaldachabuna No. 2

Apache drilled the Kaldachabuna No. 2 well on Cook Inlet Region Inc. land near Tyonek in November 2012. The well followed the 12,890-foot Simpco Kaldachabuna No. 1 well that Simasko Production Co. drilled in 1980. Despite finding oil and natural gas in the Tyonek formation, Simasko abandoned the well because of “low permeabilities and low structural position,” and because tests showed large quantities of water in the formation.

Apache wanted to use modern well stimulation techniques to see whether it could produce oil from the formation and to collect data to enhance its seismic modeling.

The Kaldachabuna No. 2 well passed through more than 100 coal seams, including 24 seams that were thicker than 10 feet, and the drill bit became stuck in coal seams several times. Apache ultimately suspended the well in April 2013 at 11,389 feet, according to Alaska Oil and Gas Conservation Commission records. Apache declined to offer any well results at the time, but the company decided to slow its exploration plans for the region.

“Frankly, we were disappointed in the well results that we had there,” Farris said in August 2013, during a quarterly conference call with analysts. “We drilled the well and actually got too close to a fault, so we really didn’t evaluate that well.”

While Apache would continue the seismic program, Ferris said it would hold off on making other plans for the time being. “I am personally still very positive about the Cook Inlet,” he said. “Obviously we’re directing cash to different things right now. So, we’ve slowed down that activity but in terms of its prospectivity, I still think it has good value.”

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