Miller Energy Resources Ltd. is among the most ambitious explorers in Alaska.
Through its subsidiary Cook Inlet Energy LLC, the Tennessee-based independent is exploring three regions in Cook Inlet - at its developments near Trading Bay on the west side, at the producing North Fork unit in the southern Kenai Peninsula and in the Susitna basin exploration license region. The company is also seeking an exploration license in the Iniskin Bay region, to the south. Through its subsidiary Savant Alaska LLC, Miller is planning an exploration program at the Badami unit on the North Slope.
Whether a small independent company can pursue all those projects with oil prices at $50 per barrel remains to be seen. “Given the continued pressure on oil prices, we’re redirecting our drilling effort towards lower-risk and predominantly gas wells,” recently appointed Miller CEO Carl Giesler said in a December 2014 statement. “We’re fortunate - and we think unique - as a company to have a solid inventory of gas wells and the ability to sell gas at a price greater than $6 per mcf. Because of the closed-loop nature of the Cook Inlet area in which we operate, gas trades for north of $6 per mcf and the state of Alaska shares via cash tax credits in 35 percent to 65 percent of our well costs.”
Otter and Olsen Creek
The principals of Cook Inlet Energy LLC formed the company in 2009 to acquire Cook Inlet assets made available during the bankruptcy of Pacific Energy Resources Ltd.
The company initially focused on reviving older Cook Inlet properties, which included investment and activities at the West McArthur River oil field, the West Foreland gas field, the offshore Redoubt unit and its Osprey platform and the onshore Kustatan production facility, as well as a minority stake in the Three Mile Creek gas field.
“Our initial strategy will be to restore base production at the West McArthur River field by repairing a couple of our champion wells, but our long-term strategy is to significantly raise oil and gas production at the properties through new drilling. This will allow us to bring proven reserves to market and prove up new additional reserves through sound geological principles and advanced drilling,” CEO David Hall said in December 2009.
The company always kept an eye on exploration opportunities, though.
An early list included prospects investigated in a wide-ranging 3-D seismic survey across the region, such as Tutna, Tazlina, North Alexander, Stingray, Olsen Creek and Otter.
In July 2012, three Cook Inlet Energy leases expired at the North Alexander prospect, near the mouth of the Susitna River, although the company kept other leases nearby.
Cook Inlet Energy has yet to pursue drilling at the Tutna or Tazlina prospects.
Cook Inlet Energy began permitting a three-well Stingray exploration program in late 2010 to test shallow gas targets on the West Foreland peninsula near the Trading Bay production facilities on the west side of Cook Inlet. The program never materialized, though, and the company ultimately relinquished some of the acreage without drilling.
Instead, in mid-2012, Cook Inlet Energy used its Rig 34 to drill the 5,680-foot Otter No. 1 well. The well tested gas targets in the Beluga and Tyonek in the northwest corner of the Susitna Flats State Game Refuge. Even though mud pump problems prevented the $7 million well from testing the Tyonek, and some of the Beluga, the company said that mud loggers reported “two significant hydrocarbon gas shows in the zone of interest.”
“We’re very excited about the Otter No. 1,” Hall said at the time. The company touted a third-party engineering reserve report estimating 45 billion cubic feet of gas at Otter.
In early 2013, as it was preparing for a deeper follow-up, Cook Inlet Energy applied to form the Otter unit over some 5,855 acres at portions of four leases at the prospect. The state rejected the application in May 2013, saying Cook Inlet Energy had failed to prove it had a viable reservoir and should proceed with exploration lease-by-lease. Following a back and forth, the state approved the unit, but required Cook Inlet Energy to post a $1.2 million bond and provide drilling dates, surface locations and bottomhole locations.
By November 2013, the company had met those terms, according to the state.
The initial plan of exploration required Cook Inlet Energy to drill two wells. The first would either be a deepening of Otter No. 1 using a coiled-tubing unit by March 31, 2014, or a grass roots exploration well slightly to the east of the original well by March 31, 2015. The second well would have been a delineation of either well by March 31, 2016.
The company met the first requirement by completing the 7,021-foot Otter No. 1A sidetrack in December 2013. Plans for the second well were delayed when the company realized it would need a larger rig, which in turn required a pad expansion. The current plan of exploration calls for drilling a well from the expanded pad by March 31, 2016.
While it was exploring Otter, Cook Inlet Energy was also considering Olsen Creek.
The gas prospect is some seven miles northeast of Otter. The company saw the potential for a 24-well development program that could produce as much as 84 billion cubic feet according to company estimates, Hall told Petroleum News. The company initially planned to drill an exploration well in late 2012 but pushed the schedule to mid-2013.
After striking a deal with the Alaska Mental Health Trust to add some 1,660 acres to the prospect, Cook Inlet Energy drilled the 7,500-foot Olsen Creek No. 1 well in June 2013.
The company drilled the Olsen Creek No. 2 follow-up well in late 2014. The two wells proved to be disappointments, though, prompting a $13.4 million write off. The failure at Olsen Creek prompted a bit of soul searching from Miller CEO Carl Giesler in December 2014. “Simply put, our operational credibility is low at best and we get that,” he said.
Sword and Sabre
As it was pursuing Otter and Olsen Creek at the northern end of the region, Cook Inlet Energy also began contemplating prospects farther south along the west side coast.
In September 2012, the company farmed in a 30 percent interest in the Sabre and Sword prospects from Hilcorp Alaska LLC. Combined with its previously held 70 percent interest, the deal gave Cook Inlet Energy total control over the prospects near the West McArthur River unit. “Sword and Sabre prospects show great potential,” Hall said, touting estimates of up to 20 million barrels of oil and 14.3 billion cubic feet of gas.
Using the Patterson-UTI Drilling Co. rig 191, Cook Inlet Energy drilled the 18,475-foot Sword No. 1 well from June to October 2013. The extended-reach directional well targeted an offshore structure adjacent to the West McArthur River unit thought to contain some 800,000 barrels of recoverable oil, according to the company. After bringing the well into production in November 2013, the company began talking about developing additional intervals and perhaps even drilling a Sword No. 2 follow-up well.
Instead, Cook Inlet Energy turned its attention to the nearby Sabre prospect. The company believed the prospect would eventually require a six-well development program at a cost of some $25 million to 30 million for the first well. The cost perhaps proved to be an impediment because in September 2014, and again in December 2014, the company said it was “evaluating joint venture offers for participation in the project.”
In early 2015, the state approved a simultaneous contraction and expansion of the West McArthur River unit. The change brought the Sword and Sabre prospects into the unit and eliminated some unproductive acreage from the southernmost lease at the unit.
The 23rd plan of development for the unit, from early 2014, envisioned drilling a Sword No. 2 well and a Sabre No. 1 well by April 30, 2016, depending on rig availability. In its development plan for 2015, Cook Inlet Energy said it might drill a Sword No. 2 appraisal well in April 2017. The company also said it was “still evaluating” a Sabre well, although, as an extended reach exploration well, the prospect conflicts with the current strategy of “developing lower risk targets.” The company said it expects to delay any work until after it has finished developing proven prospects and may seek out a partner.
Susitna basin exploration
Through its acquisition from Pacific Energy, Cook Inlet Energy inherited a 471,474-acre exploration license in the Susitna basin, west of the Parks Highway, south of Talkeetna.
The Susitna Basin Exploration License No. 2 was nearing the end of its seven-year term when the sale closed. In late 2010, the Alaska Division of Oil and Gas agreed to a three-year extension in return for $750,000 in work commitments. The extension allowed Cook Inlet Energy to either collect additional 3-D seismic or drill an exploration well.
In April 2011, the company picked up Susitna Basin Exploration License No. 4, a 10-year license covering 62,909 acres with a $2.25 million work commitment. The following April, the company picked up Susitna Basin Exploration License No. 5, a five-year license covering 45,764 acres with a $250,000 work commitment. “We elected to pursue the new license in the Susitna Basin based on its proximity to our existing acreage and the potential to leverage our onshore drilling program in this area,” Boruff said in April 2012. “We are currently evaluating the acreage and developing a work program.”
By early 2013, Cook Inlet Energy was preparing a two-well exploration program at the Kroto Creek prospect in Susitna Basin Exploration License No. 2. The company was interested in the prospect because Kroto Creek infrastructure could improve access to other prospects the company holds in the region, like Moose Creek and Big Bend. The company constructed a winter access trail and a two-well pad at Kroto Creek that year.
Toward the end of the year, Cook Inlet Energy changed its plans to a three-well program, with two wells at Kroto Creek and the third farther west at Moose Creek. Having met its spending commitments in the region, the company converted some of the license area to conventional leases, which is a common step in the exploration license program. With the conversion, the state officially terminated Susitna Basin Exploration License No. 2.
In mid-2014, Cook Inlet Energy changed its plans again. This time, the plan called for exploring three prospects in the Susitna basin - Kroto Creek and Moose Creek on ADL 390078 and Kahiltna on nearby acreage in Susitna Basin Exploration License No. 4.
Toward the end of the year, the company began permitting the 6,000-foot Kahiltna No. 2 exploration well to follow-up on the 7,265-foot Pure Kahiltna Unit No. 1 well drilled in the early 1960s. The state approved the Kahiltna exploration program in early 2015.
Iniskin Bay exploration
Cook Inlet Energy is also pursuing exploration through another license.
In August 2014, the company made a $1.5 million work commitment in return for an exploration license over 168,581 onshore and offshore acres in the Alaska Peninsula. The work commitment stemmed from a competitive bid the state hosted that summer.
The state accepts exploration license proposal once each year. The special process gives the applicant anonymity and gives other companies the chance to make a better deal.
The state received an application for an Iniskin Bay exploration license in April 2013 and the subsequent public comment period yielded a competing proposal and then the auction.
Although the region remains undeveloped, it is among the oldest exploration regions in Alaska, with observable oil seeps recorded as early as 1853 and a well drilled in 1902.
More recently, SAExploration Inc. conducted a 41-mile 2-D seismic survey between Chinitna Bay and Iniskin Bay on behalf of Hilcorp Alaska in the summer of 2013.
Any plans for exploration remain tentative until the state finalizes the license, although Miller officials have said they might pursue independent exploration or find a partner.
In a March 2015 presentation, Miller listed Sword, Sabre and the Susitna and Iniskin basin as “long-term” projects that could be developed independently or in a joint venture.
North Fork gas
In recent years, Miller has picked up two properties with exploration potential.
Miller acquired the North Fork unit from Armstrong Cook Inlet LLC for nearly $65 million in late 2013 and acquired Savant Alaska LLC for some $9 million in early 2014.
Standard Oil of California discovered the North Fork field in 1965 while searching for oil. Given the low value of gas at the time, the field went undeveloped for decades, until Armstrong Oil and Gas LLC acquired the property from an independent operator.
With four partners, Armstrong drilled the North Fork 34-26 well in June 2008.
“I am 100 percent positive we have a gas well - in any other part of the world that’s what I would say, but we still have to get a pipeline to it,” Armstrong Vice President of Land and Business Development Ed Kerr told Petroleum News in September 2008.
Kerr publically estimated that North Fork contained between 7.5 billion and 12.5 billion cubic feet of gas reserves, with the “realistic” possibility of reserves as high as 20 billion to 60 billion cubic feet. But Kerr also said that the company would need to negotiate a price between $7 and $10 per thousand cubic feet to make the prospect economic.
After securing a favorable contract with Enstar Natural Gas Co., Armstrong drilled additional wells, built a pipeline and brought the unit into production in March 2011.
With North Fork, Miller acquired six wells and 15,465 acres, the associated transmission subsidiary Anchor Point Energy LLC and the existing supply contract with Enstar.
After completing the acquisition in February 2014, Cook Inlet Energy became operator of the onshore unit in the southern Kenai Peninsula and filed an updated development plan.
Soon after taking over, the company proposed short-term and long-term plans. A proposed drilling inventory for fiscal year 2015 included working over the existing NFU 14-25 and NFU 32-35 wells, sidetracking the existing NFU 23-25 well and drilling the new NFU-07 and NFU 32-35 wells to increase gas production. A proposed fiscal year 2016 program called for drilling three new gas wells: NFU-08, NFU-09 and NFU-10.
At the time of the sale, the company also said it saw the potential to drill as many as 24 additional wells at the unit. While many of those would expand gas production at North Fork, the company also saw the potential for oil development and claims to have had “encouraging preliminary results” from an evaluation of the oil potential in the deeper Hemlock formation at the field, conducted while working over an existing gas well.
The original NFU No. 41-35 well tested minor amounts of oil in the Hemlock but not enough to convince Socal to develop the reservoir. Armstrong came up empty-handed when it extended one of its natural gas wells to test the oil potential of the Hemlock.
In a 50th plan of development for the field, submitted to the state in late December 2014, Cook Inlet Energy said it had spent the year analyzing existing seismic and well data and planning an appropriate drilling program. The company said it intended to drill three wells - NFU No. 24-26, NFU No. 42-35 and NFU No. 31-3 - from the existing North Fork pad using the recently purchased Glacier Rig 1, which is now known as Rig 37.
As of March 2015, the company had completed the NFU No. 24-26 and NFU No. 42-35 on time and on budget and was preparing to drill three workovers planned for the unit.
For the current plan of development, which runs through March 2016, Miller said it intended to continue the delineation program while also analyzing results within an eye toward a potential drilling program outside the North Fork Gas Pool No. 1 participating area. Lower risk gas targets at North Fork are a major focus for Miller in 2015, given the attractiveness of gas compared to oil in the current commodity price environment.
The Badami unit
With its acquisition of Badami, Miller became one of only three companies to operate production both on the North Slope and in Cook Inlet, along with ConocoPhillips and Hilcorp.
While Miller acquired the North Fork unit from Armstrong and its partners, it acquired Savant Alaska outright, making the small independent a wholly owned subsidiary.
The biggest component of the acquisition is control of the Badami unit on the eastern North Slope. The deal also came with pipelines and associated exploration acreage.
Conoco Inc. discovered Badami in 1990, and BP Exploration (Alaska) Inc. brought the field online in August 1998. While BP had high hopes for the field, oil production peaked a month later at 7,450 barrels per day. The next decade involved a series of starts and stops, during which time BP upgraded facilities and allowed field pressure to improve.
In mid-2008, Savant Alaska and ASRC Exploration LLC agreed to take on the challenge of restarting Badami in return for a stake in the unit. After years of development work, the partners acquired the field outright in early 2012. Savant became the newest and smallest operator on the North Slope. In early 2014, BP sold the Badami pipeline system to Nutaaq Pipeline LLC, a partnership of Savant and Arctic Slope Regional Corp.
Through its acquisition of Savant, Miller acquired a 67.5 percent interest in Badami with ASRC Exploration LLC holding the other 32.5 percent. At the time, the unit was producing some 1,100 barrels per day. “We’re excited about that acquisition,” Hall said at the time. “I think it gives us a good launch pad for the North Slope. We’ve been eying that field for a while and think there’s lots of room for growth within the Badami field and also, too, some of the exploration acreage that comes along with the acquisition.”
Initial plans called for sidetracking the existing B1-14 and B1-28 wells, at a cost of some $15 million each, according to Miller. The company estimated the wells contained some 2 million barrels of recoverable oil reserves between them. After closing on the deal in December 2014, the company announced plans to drill two Badami wells this summer.
The company is also touting exploration acreage south of the ExxonMobil-operated Point Thomson unit to the east, although it has not yet made any definitive plans for the region.
Low oil prices have dulled the luster of the unit for the time being.
In its March 2015 presentation, Miller placed its activities at Badami “on hold” for this year and said it would look for “well enhancements” opportunities “in the interim.” The company listed the project as a potential for a joint venture, farm-out or sell-down.
Hungry for prospects
Those exploration projects (and its development work) will likely keep the company busy, but Miller has shown a willingness to pursue available opportunities in Alaska.
In September 2014, Miller signed a non-binding letter of intent to buy the Alaska assets of Buccaneer Energy Ltd., which had filed for bankruptcy protection earlier in the year.
Ultimately, Cook Inlet Energy bid $35 million through a bankruptcy auction. Although it was the largest cash bid, Buccaneer sold its assets to its largest creditor, AIX Energy LLC, for a $44 million “credit bid,” which involve bidding debt against other cash offers.
