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Vol. 12, No. 2 Week of January 14, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Cracking the southern Kenai gas puzzle

As Enstar edges forward with ideas for an extension to the Kenai Kachemak pipeline, DNR extends the North Fork unit

Alan Bailey

Petroleum News

The potential development of natural gas in the southern part of Alaska’s Kenai Peninsula is starting to look a bit like a chicken with a rather promising egg. Several known gas accumulations exist south of the existing pipeline infrastructure, but oil and gas companies with gas in the ground need access to markets through a convenient pipeline. And any company interested in building a pipeline needs some assurance that the oil and gas companies will develop sufficient gas reserves to justify pipeline development costs.

So, who will crack the egg first — a producer or a pipeline constructor? And is the egg big enough to be worth cracking?

In December the Alaska Department of Natural Resources’ extended the North Fork unit, with its known gas pool about 10 miles north of the town of Homer. That and Enstar Natural Gas Co.’s continued interest in building a southern Kenai Peninsula gas pipeline seem to signal optimism about the gas potential of the region.

Kenai Kachemak pipeline

The Kenai Kachemak pipeline (or KKPL), jointly owned by Marathon and Chevron, is the most recent and most southerly pipeline on the Kenai Peninsula. KKPL started shipping gas north from the Ninilchik field, located a little more than halfway down the west coast of the peninsula, in 2003. A year later KKPL was extended inland 15 miles to the southeast to connect with Unocal’s new Happy Valley gas field (Chevron later acquired Unocal).

But as early as 1965 Standard Oil of California struck natural gas in its North Fork 41-35 well when searching for oil in the area. North Fork lies inland in the peninsula about 12 miles south of the most southerly point on the Kenai Kachemak Pipeline.

Gas-Pro Alaska LLC acquired the North Fork unit from Unocal in 1996 and NorthStar Energy bought Gas-Pro in 2000. In 2001 NorthStar tested the 41-35 well and reported a flow of 4 million cubic feet per day of natural gas from one interval at 8,500 feet. In 2003 NorthStar struck a deal with Enstar to supply gas from North Fork to Homer. The deal involved Alliance Energy, a sister company to NorthStar, building a pipeline from North Fork to Anchor Point, a few miles northwest of Homer, and Enstar building a pipeline from Anchor Point to Homer.

However, both Enstar and the Regulatory Commission of Alaska required that pipeline construction be contingent on drilling a second North Fork well, to raise proved reserves in the field from 12 billion cubic feet to 14.5 bcf and to ensure a 20-year gas supply for Homer.

That second well has never been drilled.

Notice of unit termination

The North Fork unit included both federal and State of Alaska land and was administered by the U.S. Bureau of Land Management. In March 2006 BLM informed NorthStar that the unit would be terminated on Oct. 1 if a second well were not drilled in the unit. And in July 2006 NorthStar informed Enstar that it could no longer fulfill the Homer gas supply contract.

Then, in August, Enstar told Homer city council that the company was considering building a high-pressure gas transmission line south from the end of the Kenai Kachemak pipeline at Happy Valley to Homer. The new line would hook up to production from a known gas pool penetrated by the Red well in the Chevron-operated Nikolaevsk unit, close to North Fork. The line would take about four years to complete at an estimated cost of $16 million, Enstar said.

In parallel with the construction of the gas transmission line, Enstar would start building out a gas distribution network centered on Homer, at an estimated cost of $14 million, to serve an estimated 3,000 customers in the Homer area.

DNR unit extension

On Nov. 1 the title to the federal land within the North Fork unit was conveyed to the State of Alaska as part of the land transfers emanating from Alaska statehood. DNR took over administration of the unit from BLM. And on Dec. 13 Kevin Banks, acting director of the Division of Oil and Gas, wrote to Gas-Pro offering to extend the North Fork unit to March 31, provided that Gas-Pro met certain conditions, including the payment of a lease sale deferral bid payment and the posting of a performance bond payable to the state.

Gas-Pro has met the state’s stipulations for the extension of the lease, DOG told Petroleum News Jan. 3.

Also, under the stipulations set by the state, the terms of the current 41st plan of development for the unit will continue until March 31, by which time Gas-Pro must file the 42nd plan of development, to prevent unit termination at that date. DOG told Petroleum News that if the division approves the 42nd plan of development the division would extend the unit beyond March 31.

And Jan. 3 Barry Foote, Gas-Pro vice-president, told Petroleum News that his company still hopes to develop North Fork.

“We’re still bullish on Alaska,” Foote said. “We’re ready to move.”

Needs a pipeline

Foote said that Gas-Pro has been unable to justify the cost of drilling a second well at North Fork because of the lack of a pipeline to deliver gas to market. If the company were to go ahead and drill another well it would likely take several years before a pipeline to export gas from North Fork would be completed. That time delay might increase the effective cost of the well from perhaps $3 million or $4 million to $8 million, Foote said.

Foote also said that the small size of the Homer gas market detracts from the economics of developing North Fork.

Gas-Pro is enthusiastic about Enstar’s proposal for a gas line connecting Homer with the Red well and the Kenai Kachemak pipeline — that pipeline would open up potential markets both north and south of North Fork.

“We’re hopeful that Enstar is going to push forward aggressively with an extension of the KKPL,” Foote said. “… We feel good about where our well is. … If the infrastructure was there we’d start drilling tomorrow.”

Foote also said that acreage Alliance Energy picked up near North Fork in the last state Cook Inlet areawide lease sale contains a promising gas prospect that is also conveniently placed for a hook up with Enstar’s proposed pipeline.

On Jan. 3 Enstar spokesman Curtis Thayer confirmed that Enstar still wants to develop a gas transmission line in the southern Kenai Peninsula and that the company is still very interested in the possibility of a line running south from the Red well. That would probably be a 4-inch transmission line, Thayer said (the Kenai Kachemak pipeline is a 12-inch line).

“If there is gas supply in the southern Kenai Peninsula we are interested in bringing it to market,” Thayer told Petroleum News.

Cosmopolitan

Thayer said that Enstar has also been discussing with Pioneer Natural Resources the possibility of obtaining gas from the Cosmopolitan prospect, offshore Anchor Point. Although Cosmopolitan is an oil prospect, Pioneer has told Enstar that there is natural gas associated with the oil, Thayer said.

Thayer also said that a gas transmission line in the southern peninsula would open up other gas exploration opportunities in the area.

That view seems to be shared by other companies, judging by the results of the state’s May 2006 Cook Inlet lease sale. In addition to Alliance Energy, Benchmark Oil & Gas and Rutter & Wilbanks both bought acreage inland in the region.

But it remains to be seen what it will take to crack open gas development in the southern peninsula.



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