Following a difficult year in 2006, Aurora Gas remains in something of a holding pattern while it tries to resolve its future. Aurora Gas has spent the majority of 2007 focused on its ongoing litigation with Enstar Natural Gas Co. and on its efforts to sell or recapitalize the company, Aurora Gas President Scott G. Pfoff told Petroleum News Oct. 29, 2007. Efforts to sell the company have progressed but not to a point where Aurora Gas is prepared to release any information, Pfoff said.
After its formation in 2000 the company established itself as a small, independent explorer and producer, bringing natural gas to market in Alaska’s Cook Inlet. A relatively low-risk strategy of drilling close to known gas accumulations transitioned in 2004 to the drilling of more risky exploration prospects.
In late 2004 Aurora Gas drilled its first pure exploration well, the Three Mile Creek No. 1. It was a discovery.
And by the end of 2005 the company was operating five fields on the west side of the Cook Inlet: the Kaloa, Lone Creek, Moquawkie, Three Mile Creek and Nicolai Creek fields.
This initial exploration success was followed by the drilling of dry exploration wells at Aspen in 2005 and Long Lake in 2006 — both of these wells were on the west side of the Cook Inlet.
Swift joint ventureIn March 2006 Aurora Gas and Swift Energy Co. announced a joint venture to explore some of Aurora Gas’s Cook Inlet acreage. And in April 2006 the joint venture drilled a wildcat well at the Endeavour oil prospect in the southwestern Kenai Peninsula. The 9,225-foot well proved to be a dry hole, despite its proximity to a known oil accumulation in very similar geology at the Hammerhead prospect near Anchor Point.
The agreement with Swift contemplated the possibility of drilling at least two wells, Ed Jones, Aurora Gas’s executive vice president engineering-operations, told Petroleum News in March 2007 — potential oil prospects include a target below the Aspen gas prospect that Aurora Gas drilled in 2005. But Pfoff said in March that Swift was preoccupied with some recent acquisitions in Louisiana. In October Swift told Petroleum News that it had diverted manpower working on Alaska to deal with “two sizable acquisitions” that the company had made during the past year.
In November 2005 Aurora Gas signed an agreement with Trading Bay Oil and Gas to take a majority interest in the Hanna prospect on the west side of the Cook Inlet, but an initial plan to drill a well at Hanna in 2006 was postponed. In addition to a fairly shallow gas prospect, Hanna has a deeper oil prospect that Aurora Gas advertised in the 2007 NAPE expo.
Recompletions and workoversIn 2006, in addition to its exploration drilling, Aurora Gas also focused on recompletions and workovers, with what it described as moderate success in the Nicolai Creek 1B, Lone Creek 1, Mobil Moquawkie 1 and Nicolai Creek 9 wells, using the company’s own AWS No. 1 drilling rig that the company had also used for much of its exploration drilling.
But in 2006, the company ran into difficulties with the commercial arrangements for the sale of its Cook Inlet gas — in October of that year the company suspended its supplies of gas to Enstar Natural Gas Co., the major Southcentral Alaska gas utility, because of gas prices that Pfoff described as “far below what is economic.” That suspension of delivery resulted in Enstar suing Aurora Gas for breach of contract, although Aurora Gas said that it had the contractual right to the suspension.
Pfoff also told Petroleum News that the State of Alaska’s use of “prevailing value” to calculate royalties on gas production compounded the commercial problems by penalizing producers who supply gas at below average prices for the Cook Inlet region.
Perfect stormAnd, in what Pfoff described as “a perfect storm” compounded by “geologic complexity, the high-cost environment in which Aurora Gas operates and recent commercial uncertainty,” the company suspended its drilling operations in October 2006. The AWS No. 1 rig returned to Nikiski on the Kenai Peninsula, where it has remained mothballed ever since.
“We see no incentive to continue the search for gas until this issue (with Enstar) can be resolved; and if the issue is not resolved in Aurora Gas’s favor, the result will be no further exploration and development by Aurora Gas in our core area of operations,” Pfoff said.
In March 2007 Pfoff told Petroleum News that Kaiser Francis Oil Co. of Tulsa, Okla., which owns more than 90 percent of Aurora Gas, was taking a hard look at whether it wanted to spend more money on Cook Inlet exploration wells. Kaiser subsequently decided not to invest further in Cook Inlet exploration and Aurora Gas has been trying to find a new owner or investors, Pfoff said in October.
Meantime the contractual dispute with Enstar is scheduled for trial in the first quarter of 2008 in a Superior Court for the State of Alaska district court, Pfoff said.
“It has been in an extremely frustrating year for Aurora Gas,” Pfoff said. “We would much rather be utilizing our resources to find and develop badly needed Cook Inlet gas reserves; instead we have had to devote our energy on fighting senseless litigation.”