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Vol. 11, No. 14 Week of April 02, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Aurora, Swift form JV

First project Endeavour wildcat; JV will apply across Cook Inlet Basin

Alan Bailey

Petroleum News

Aurora Gas LLC and Swift Energy Co. announced March 30 that they have entered into a joint venture to explore for oil and gas on Aurora’s acreage in Alaska’s Cook Inlet region. The first activity of the new partnership will be the drilling of the Endeavour No. 1 wildcat oil well near Anchor Point on the southern Kenai Peninsula. Swift Energy now has a 50 percent working interest in the Endeavour well, with Aurora as operator.

But the new joint venture will apply to oil and gas exploration across the whole of the Cook Inlet basin. “Swift Energy will earn an average working interest of 37.5 percent in approximately 54,500 gross acres in seven areas of mutual interest, which represents half of Aurora Gas LLC’s working interest in the areas of mutual interest,” according to a Swift Energy press release. Aurora says that it had 140,000 acres under lease in the Cook Inlet Basin at the end of 2005.

“It’s a joint venture to work together to basically explore our prospects for oil but also for gas in the whole Cook Inlet basin,” Scott Pfoff, Aurora’s president, told Petroleum News. “It’s not a one time shot.”

Significant development

“This may very well be the most significant development of the decade in Cook Inlet oil exploration,” said Aurora Vice President of Exploration Andy Clifford. “Swift Energy ranks among the top U.S. independents and is a highly successful oil and gas E&P company. They will be a very welcome addition to the current cast of players in the Cook Inlet basin.”

Houston, Texas-based Swift Energy is a publicly traded oil and gas company with interests in Louisiana, Texas and New Zealand (see sidebar).

“This new venture in the onshore Cook Inlet basin in Alaska fits perfectly with Swift Energy’s stated strategy of looking for under-explored areas with large acreage positions and significant reserves’ potential in a prolific producing basin with multiple productive horizons,” said Bruce Vincent, president of Swift Energy. “We look forward to working with Aurora Gas, an experienced operator in the Cook Inlet, establishing a successful partnership and expanding upon their successes to date.”

Robert “Bob” Banks, Swift International’s vice president of international operations, spearheaded the deal with Aurora in Alaska. According to a company spokesman Banks will continue to oversee Swift’s interest in the JV.

Rig mobilizing for Endeavour

Aurora is mobilizing the Kuukpik Rig No. 5 for the Endeavour well and, according to Ed Jones, Aurora’s executive vice president of engineering operations, Aurora has started site preparations at the drill pad near Anchor Point. The Kuukpik rig has recently completed drilling of Storm Cat Energy’s Northern Dancer No. 1 well in the Matanuska-Susitna Borough.

“We plan to mobilize the rig tomorrow and spud the well sometime next week,” Pfoff said March 30.

Aurora has in the past used its own AWS 1 rig for gas exploration and development on the west side of the Cook Inlet. But that rig lacks the horsepower needed to drill to the depths of the Endeavour prospect.

“We’ve always used our own rig to drill our prospects on the west side of the inlet where we were drilling into shallow gas sands, but the first Endeavor well is a 9,200-foot well on the east side,” Pfoff said.

In fact drilling at Endeavour will mark a departure from Aurora’s traditional strategy of developing low-risk, shallow gas deposits around the Cook Inlet.

“We said in November at the Resource Development Council meeting that we were going to bring oil exploration back to Cook Inlet and we’re going to keep that promise,” Pfoff said.

8,000 to 9,000-foot depth

The Endeavour prospect is in the Hemlock and lower Tyonek formations, at depths between 8,000 and 9,000 feet, Clifford told Petroleum News in August. Clifford said that the stratigraphy and structure of the prospect exactly mirror the nearby, offshore Cosmopolitan prospect — Cosmopolitan is known to contain oil.

“There’s just one syncline between Cosmopolitan offshore and Endeavour onshore,” Clifford said.

Aurora will drill from the pad that Unocal constructed for its Griner gas exploration well in 2002. The Griner well reached a true vertical depth of 6,700 feet and found some gas in upper Tyonek sands, although the well was later plugged and abandoned.

It should cost about $3.5 million to drill the Endeavour well, substantially less than the cost of a directional well to an offshore target, Clifford said in August. Clifford also said that, in the event of a find, it would probably take four or five wells to delineate the structure.

Gas potential also

Clifford said that there is potential for finding gas in horizons above the Endeavour oil prospect and that the possibility of the Endeavour well finding gas reduces the economic risk of the project. In February Aurora applied to the Alaska Oil and Gas Conservation Commission for a well spacing exception, in case the well encounters a gas accumulation during drilling operations — AOGCC regulations for spacing to property boundaries for gas wells are more stringent than those for oil wells.

And the land ownership situation in the area of Endeavour is complex, with a mixture of state, Native and other land holdings.

“We’ve also got a lot of fee minerals down there too — it’s all subdivisions,” Clifford said. “… It’s taken two years to accumulate the lease position down there.”

Straightforward drilling

But, with easy access to the Kenai Peninsula road system, drilling in the area should prove relatively straightforward. Aurora expects that the use of existing roads and pads, coupled with substantial environmental protection measures, will minimize both the environmental impacts of the work and the disturbance to the local community.

“Onshore there at Anchor Point we can use existing roads, existing gravel pads, everything will be hidden and buried and tucked away,” Clifford said.

And the existence of a highway from Anchor Point to Nikiski in the northwest Kenai Peninsula should simplify the construction of a buried oil export pipeline, Clifford said. Nikiski has oil export facilities and an oil refinery.

There’s also the tantalizing possibility of oil development happening at both Endeavour and the neighboring Cosmopolitan prospect.

So, what comes after Endeavour No. 1?

“Hopefully Endeavour No. 2,” Pfoff said. “This is a rank wildcat, so you know the averages for that, but hopefully we will have a discovery. … After Endeavour we will use what we’ve learned from it and see which prospect looks best, and most likely drill another.”

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Swift prefers to operate

Founded in 1979, at the end of 2005 Houston-based independent Swift Energy Co. was the largest crude producer in Louisiana, had a total capitalization of $904 million, a net debt to equity ratio of 33 percent, a net income of $115.8 million (up from $68.5 million in 2004) and a total of 311 employees.

“You can count on one hand the number of companies of our size that are around after 25 years,” Alton D. Heckaman Jr., Swift’s executive vice president and chief financial officer, told the Raymond James 27th Annual Institutional Investors Conference in early March.

Swift’s finding and development costs at the end of 2005 were “just under $2.50 per barrel” and its cap-ex budget for 2006 was expected to be $300-$325 million, Heckaman said, noting that Swift is “the most active driller in both Louisiana and New Zealand.”

Sixty percent of the 2006 cap-ex budget will be spent on development projects in the company’s four core operating areas, three of which are onshore and in inland waters in the continental United States (in Louisiana and Texas) and the other in New Zealand.

But $50-$60 million was designated for “other” cap-ex needs, a portion of which will be spent in Alaska where Swift has just entered into a joint venture with Aurora Gas to explore Aurora’s Cook Inlet basin oil and gas properties.

According to Aurora President Scott Pfoff, Aurora will operate the initial test well for the joint venture. He deferred to Swift when asked which company would be the operator after that well.

Swift had not replied by the time Petroleum News went to press, but at the Raymond James conference Heckaman said Swift likes to “control its own destiny” by maintaining “operational control of its reserves. … We have a high level of operating control. We operate 96 percent of our reserves. … In most of our properties we have 100 percent working interest, which allows us to move on a dime.”

Swift “typically” goes into a mature area “to try to exploit what’s there, but we always keep an eye on the exploration upside.” He also said Swift always looks “for the lowest-priced hydrocarbons in the ground.”

Heckaman said the company has “a very balanced reserve base — 762 billion cubic feet equivalent at the end 2005,” which is split “50-50 between crude oil and natural gas.”

Swift’s reserves growth, Heckaman said, is primarily accomplished through a mix of exploratory and development drilling and property acquisitions — generally producing properties, according to the business strategy posted on Swift’s Web page. The specific mix of drilling and acquisitions is quickly adjusted in response to changing industry conditions, with special emphasis on the price of oil and gas, Heckaman said.

One of the company’s “mantras over time,” he said, has been “keep it conservative.”

—Kay Cashman