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Vol. 18, No. 35 Week of September 01, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Small producers worry

Buccaneer, Cook Inlet Energy, Furie see Inlet competition dwindling

Eric Lidji

For Petroleum News

A group of smaller independents worry that a supply agreement between Enstar Natural Gas Co. and Hilcorp Alaska LLC might harm a burgeoning revival in Cook Inlet.

As Buccaneer Alaska LLC, Cook Inlet Energy LLC and Furie Operating Alaska LLC see it, the proposed four-year contract between the largest gas producer and the largest gas consumer in the region closes the market to third parties, which could crimp ongoing efforts to boost investment or force small producers to demand exporting privileges.

“Considering the significance of the local space heating market,” Furie President Damon Kade wrote to the Regulatory Commission of Alaska, “Enstar’s decision not to reserve room in its gas portfolio for diversification in natural gas sources until after the first quarter of 2018 may reduce the number of active explorers and producers in Cook Inlet.”

Enstar believes it did what it could to diversify its portfolio — which already contains production from other suppliers — but needs to address unmet demand for the near term.

The proposed contract, called APL-12, would fill Enstar’s unmet needs between April 1, 2014, and March 31, 2018 — approximately 63.5 billion cubic feet of gas over four years.

To make some room for other players, the companies want the RCA to require Enstar to diversify its portfolio as new supplies come online, or shorten the term of the contract.

While these volumes come as a huge relief to Enstar, who only months ago was mulling over the idea of importing liquefied natural gas to supplement local production, the small producers worry it could send the region right back to the dark days of 2008, when a near absence of exploration threatened the long-term viability of the basin as an energy source.

Since then, state incentives and a drop in Lower 48 commodity prices brought new players to Cook Inlet. Those include Buccaneer, Cook Inlet Energy and Furie, as well as Hilcorp, but also Armstrong Cook Inlet, Apache Corp., NordAq Energy Inc. and Linc Energy (Alaska) Inc. Currently, only Armstrong, Buccaneer, Cook Inlet Energy and Hilcorp, plus established players ConocoPhillips and Aurora, have production online.

‘No other supplier was able’

The situation highlights the continued fragility of the region.

In securing its current contract, Enstar claims to have approached essentially every producer and would-be producer in the region, but only found Hilcorp to be satisfactory.

When the RCA asked Enstar about its attempts to diversify its portfolio, the utility said, “No other supplier was able to provide the proven reserves behind pipe and the deliverability ENSTAR required in these years to meet the needs of its customers.”

Even with its near term needs under control, Enstar is still keeping the possibility of importing gas on the table. Without additional supplies, the new contract would prove to be a “cushion” during the years needed to arrange the complex importing operation.

Those facts would suggest the market is still struggling to regain self-sufficiency: the recent increase in investment has yet to boost production in any considerable way.

More production expected

For the producers, though, the question is: What will happen between 2014 and 2018?

All three companies expect to bring more production online.

Buccaneer produces some 6.5 million cubic feet per day from its Kenai Loop field, but expects the rate to reach 10 mmcf per day as a well the company drilled earlier this year ramps up and perhaps even higher with the completion of drilling currently under way.

Additionally, Buccaneer claims to have discovered “significant new gas reserves” at its Cosmopolitan prospect, and plans to explore its West Eagle and Southern Cross units this year, both of which are thought to contain gas in some quantity, perhaps economic.

While Cook Inlet Energy is primarily producing oil from its Cook Inlet operations, the company said it is “actively exploring and drilling for natural gas and oil” on its leases.

And perhaps the most intriguing forecast came from Furie.

While Furie currently operates no production, the company has been drilling exploration wells at its Kitchen Lights unit for several seasons now. The company said it responded to the solicitation from Enstar by proposing to provide gas starting in late 2014 — about six months after the April 1, 2014, date Enstar desired for the start of any contract.

To prove its credentials, Furie offered to show Enstar “confidential well flow test data” from its Kitchen Lights drilling plus its plans for the facilities it intends to install next year, according to Kade. But “when Furie followed up with Enstar just over a month later, Enstar stated that it had already contracted for all of the volumes it required.”

Shut out?

While the comments mostly concern the terms Enstar is prepared to accept in return for a guaranteed supply in the short-term, the matter also touches on Hilcorp’s dominance.

By acquiring the Cook Inlet assets (and obligations) of Union Oil Company of California and Marathon Oil Co., Hilcorp was already on the hook to provide 40 percent of Enstar’s needs through early 2018. The proposed contract would increase the figure to 85 percent.

In addition to APL-12, Hilcorp recently negotiated similar contracts with Chugach Electric Association and Matanuska Electric Association — providing both utilities with the un-contracted gas volumes they expect to need through 2018. And Fairbanks Natural Gas recently announced a contract through 2018 with an unnamed Cook Inlet supplier that, because of its end date, both Buccaneer and Cook Inlet Energy assume is Hilcorp.

A consent decree between the state and Hilcorp caps the price the producer can charge local utilities for gas, and prohibits exports unless all local needs are met, but allows the company to control (or supply, as the case may be) as much of the local market as it can.

The three small producers worry the market won’t accommodate their production.

“Hilcorp has effectively locked up the utility market,” Buccaneer Vice President of Land and Business Development Mark Landt and Cook Inlet Energy President J.R. Wilcox wrote in separate but similar comments, “so the RCA and Enstar should not be surprised when the remaining independent producers either choose alternative markets for their gas, seek to provide direct sales to Enstar’s customers or not fund drilling programs targeting natural gas.” Those “alternative markets” could include exports, Landt added.

Such uncertainty about the market could keep supplies from coming online by scaring away investors, according to Buccaneer and Cook Inlet Energy. Furie went even further, saying it “may reduce the number of active explorers and producers in Cook Inlet.”

APL-12 includes a “market out” provision, which allows Enstar to buy less gas from Hilcorp should its customers buy directly from other gas suppliers. Practically speaking, only certain larger customers can take advantage of such an opportunity, and, according to Buccaneer and Cook Inlet Energy, the terms of APL-12 would further limit this already small market by setting a floor on the volumes Enstar must commit to purchase.

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