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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: Cook Inlet Energy quickly racking up exploration

The small independent has consistently pursued numerous exploration projects while it expands development

Eric Lidji

For Petroleum News

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.

Since then, the local subsidiary of Tennessee-based Miller Petroleum Inc. has primarily focused on bringing older Cook Inlet properties back into production. But the company has also conducted exploration and amassed a portfolio of exploration license acreage.

And recently, Miller acquired Savant Alaska LLC, the small independent responsible for bringing Badami unit on the eastern North Slope back into sustained production.

After months of legal proceedings, Cook Inlet Energy submitted a winning bid in late 2009 to acquire Pacific Energy properties on the west side of Cook Inlet. A $2.25 million bid, plus $2.2 million to cover other obligations, bought the West McArthur River oil field, the West Foreland gas field, the offshore Redoubt unit and its Osprey platform, the onshore Kustatan production facility and a 30 percent stake in the Three Mile Creek 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.

Cook Inlet Energy has worked over numerous wells at West McArthur River and Kustatan to increase production and brought the dormant Osprey platform back online.

In late 2013, Cook Inlet Energy acquired the North Fork field for $65 million from operator Armstrong Oil & Gas Inc. and its four partners. Cook Inlet Energy wants to expand the onshore gas field in the southern Kenai Peninsula north of the city of Homer.

Cook Inlet Energy acquired a selection of tracts around its existing acreage at lease sales in 2010 through 2013, but also sold some offshore acreage to Buccaneer Energy Ltd.

Early exploration ideas

While it pursued development opportunities, Cook Inlet Energy began discussing a wish list of exploration prospects it hoped to undertake if it could secure some financing.

Those included Tutna, Tazlina, Stingray, North Alexander, Olsen Creek and Otter, all of which had been covered by a wide-ranging 3-D seismic acquisition across the region.

As it analyzed the seismic data, Cook Inlet Energy also began renewing its Oil Discharge Prevention and Contingency Plan with the Alaska Department of Environmental Conservation. The plan was anchored with the Tutna prospect, but covered all six prospects.

The plan was to explore the prospects using the retrofitted and winterized truck-mounted Miller Rig 34, an Atlas Copco RD20 rig sent to Alaska by its Tennessee parent company.

In late 2010, Cook Inlet Energy began permitting a three-well exploration program at Stingray. The program would have tested shallow gas targets on the West Foreland peninsula near the Trading Bay production facilities on the west side of Cook Inlet.

The proposed 2,000 to 2,500-foot Stingray No. 1 would have tested “the gas producing potential of Beluga sands identified in an offset well, the West Foreland State A1, and mapped seismically,” Cook Inlet Energy said in filings with the state. The proposed Stingray No. 2 would have been about a quarter mile southwest of Stingray No. 1. The proposed Stingray No. 3 would have been some half a mile northeast of Stingray No. 1.

The program was far along in the permitting process by early 2011, but never advanced. Cook Inlet Energy surrendered five leases around the prospect in March 2012, but held on to ADL 390735 and ADL 391608, which included its proposed location for Stingray No. 1.

Starting with Otter

By September 2011, Cook Inlet Energy was permitting an exploration program at the Otter prospect in the northwest corner of the Susitna Flats State Game Refuge.

Cook Inlet Energy drilled the 5,680-foot Otter No. 1 well in mid-2012 to test gas targets in the Beluga formation. Early permitting documents for the well had proposed a 7,000- to 7,500-foot well targeting the Lower Miocene Sterling and Beluga formations and the Upper Oligocene-Lower Miocene Tyonek formation. Mud pump problems prevented the well from testing the Tyonek and some of the Beluga, but the company was optimistic.

“The mud loggers reported two significant hydrocarbon gas shows in the zone of interest,” Hall said at the time. “We’re very excited about the Otter No. 1.”

The well cost some $7 million, according to Miller Energy Resources executives.

Cook Inlet Energy subsequently conducted a hydraulic fracturing operation on the well and acquired more robust mud pumps in preparations for a 7,500-foot follow-up.

But in early 2013, before drilling the second well, Cook Inlet Energy asked the state to form the Otter unit covering some 5,855 acres over portions of four leases at the prospect.

A unit would have extended two leases on the verge of expiring, but Cook Inlet Energy said unitization would also reduce the number of drilling pads needed to explore the area.

The company proposed re-entering and deepening the Otter No. 1 well, drilling a second well by March 2015 and drilling a delineation well to the northeast by March 2016.

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.

Cook Inlet Energy appealed the decision and accused the state of creating a “new policy” running counter to existing rules and established precedent. The policy was against “exploration units,” or using unitization to hold leases during the exploration work. The company said drilling was unlikely on a lease-by-lease basis because “investors simply are not going to commit capital for a project unless the acreage position is secure.”

The state ultimately approved the unit, but required Cook Inlet Energy to post a $1.2 million bond and provide drilling dates, surface locations and bottom-hole locations.

Olsen Creek and others

Cook Inlet Energy turned its attention to the Olsen Creek prospect in late 2012.

The gas prospect is some seven miles northeast of Otter, west of the Beluga River gas field. The company saw the potential for drilling as many 24 wells on its leases to produce an estimated 84 billion cubic feet from the reservoir, Hall told Petroleum News.

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.

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.

Sabre, Sword and more

Cook Inlet Energy has also mentioned Sabre, Sword, Raptor and Valkyrie prospects.

The company already held a 70 percent working interest in two leases constituting the Sabre and Sword prospects adjacent to the West McArthur River unit, and, in September 2012, the company farmed in the remaining 30 percent from Hilcorp Alaska LLC.

At the time, Cook Inlet Energy said it intended to explore the two prospects within three years and ideally gain the complete 100 percent working interest ownership over both.

“Sword and Sabre prospects show great potential,” Hall said, touting internal company estimates of up to 20 million barrels of oil and 14.3 billion cubic feet of natural gas.

Cook Inlet Energy secured the Patterson-UTI Drilling Co. rig 191 in May 2013 and drilled the 18,475-foot Sword No. 1 well from June to October. 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.

The well encountered “many identified potential zones behind pipes” and the company planned test the Hemlock followed by shallower zones. “Based on log results, our Sword well has extraordinary potential and we believe it could double the reserves currently reported for the West McArthur field while providing us a launch pad for drilling into Sabre, which is an even larger identified prospect,” Boruff said in a statement at the time.

In November 2013, Cook Inlet Energy brought the well online at a rate of 883 barrels of oil equivalent per day over a 96-hour period, according to the company. In May 2014, Cook Inlet Energy said the well had penetrated three zones, but was only producing from the Hemlock, at a rate of about 600 barrels of oil per day. “The two additional zones are expected to add significantly to the Hemlock production,” the company said. A subsequent test of the Tyonek G zone averaged some 290 bpd, according to the company.

The initial Sword results convinced Cook Inlet Energy to consider a second Sword well, but first the company turned its attention to the adjacent Sabre prospect. The company had planned to drill in early 2014, but those plans had yet to come to pass by May 2014. The company recently bought a $3.25 million Baker Process Inc. rig for the prospect and said that “several potential joint venture partners” have expressed in the Sabre prospect.

Cook Inlet Energy recently said a Sabre development would require up to six wells and “we expect that the preliminary gross cost to drill, test and complete the first well in this prospect will be in the range of approximately $25-30 million,” according to Miller.

Cook Inlet Energy has yet to detail plans for Raptor or Valkyrie.

In June 2011, Cook Inlet Energy secured a two-year $100 million credit facility with New York-based Guggenheim Corporate Funding LLC and others. The company said it would use the facility to fund construction of the $19.5 million Miller Rig 35, a National 1320 model built for Osprey, plus drilling new wells and working over existing wells.

In July 2012, Miller Energy Resources Inc. secured a five-year $100 million credit facility to fund existing operations, to drill new wells and to work over existing wells.

Susitna Basin exploration

Alongside this work, Cook Inlet Energy has been eyeing an underexplored basin.

The original sale included an exploration license covering 471,474 acres west of the Parks Highway between the Houston and Talkeetna communities in the Susitna basin.

The Susitna Basin Exploration License No. 2 was nearing the end of its seven-year term when the sale closed, and in late 2010 the Alaska Division of Oil and Gas agreed to a three-year extension in return for $750,000 in work commitments. Given the exploration history of previous operators, Cook Inlet Energy could have converted all or some of the license area to traditional leases, but chose an extension to provide more flexibility.

The extension allowed Cook Inlet Energy to either collect additional 3-D seismic over the region or to use existing seismic to inform a one-well exploration drilling campaign.

In October 2011, Cook Inlet Energy said it was studying 2-D seismic shot by a previous operator in 2006 and had conducted “boots on the ground” survey of outcroppings, but was still trying to decide whether to shoot more seismic or move directly to drilling.

By early 2013, Cook Inlet Energy was preparing an exploration program in the Susitna basin. The program envisioned as many as two gas exploration wells at its Kroto Creek prospect, some 12 miles northwest of Willow Creek Landing on the Susitna River.

The roads for Kroto Creek could also improve access to other Cook Inlet Energy prospects in the region, like Moose Creek and Big Bend, the company said.

The company completed a winter access trail and a two-well pad at Kroto Creek in March and April 2013, and announced plans to drill during the following winter.

By November 2013, Cook Inlet Energy was discussing plans to drill up to two wells at Kroto Creek and a third well farther west at Moose Creek. Having met its $750,000 work commitment for the exploration license, the company also asked the state to convert the portion of the license area covering those prospects to traditional leases. The exploration license expired in October 2013 and the state issued 25 traditional leases to the company.

Cook Inlet Energy maintains two other exploration licenses in the Susitna basin.

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.

And in April 2012, Cook Inlet Energy 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 an April 2012 statement. “We are currently evaluating the acreage and developing a work program.”

The state is also eager for companies to explore the basin.

With an eye toward reducing the high infrastructure costs required to access the surprisingly remote western end of the basin, the Alaska Department of Transportation and Public Facilities commissioned a study to look at ways of improving access to the region. A February 2014 report identified five potential routes for development.

The original sale also included more than 600,000 acres of exploration lands.

The sale included two Alaska Mental Health Trust Authority leases adjacent to the Three Mile Creek field. Under a deal announced in late 2010, Cook Inlet Energy agreed to drill an exploration well on one lease by the end of 2011 or risk losing acreage and an exploration well on the other lease by the end of 2012 or risk paying a $250,000 fine.

In December 2012, Cook Inlet Energy sought to expand its Alaska Mental Health Trust leasehold in the area to include a portion of two recently expired Apache Corp. tracts.

Advocating for little guys

In its brief tenure in Alaska, Cook Inlet Energy has been an advocate for small producers.

“Small producers, while not doing the big sexy projects, are actually giving you your bread and butter production,” President J.R. Wilcox said at the Meet Alaska conference in 2011.

While asking the state to improve access and simplify permitting and taxation, Cook Inlet Energy also joined other small producers in challenging a four-year supply contract between Hilcorp Alaska LLC and Enstar Natural Gas Co. Cook Inlet Energy acknowledged the benefit of the contract for the supply-constrained region, but asked regulators to guarantee small producers would always be able to sell into the market.

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