AIX Energy LLC is steadier, quieter and more cautious than its Kenai Loop predecessor.
The small Texas-based independent is anticipating a range of development projects over the next year to improve the operation and production profile of the onshore Cook Inlet natural gas field. But those plans are unlikely to include drilling new wells or sidetracks.
After acquiring the debt of Australian independent Buccaneer Energy Ltd. in April 2014, AIX Energy acquired most of the company’s Alaska assets at an October 2014 auction.
Prior to the acquisition, Buccaneer was actively pursuing drilling opportunities at the small field near the city of Kenai with limited success. Since the acquisition, AIX Energy has limited its activities to maintenance, upgrades and repairs of existing infrastructure.
Over the course of its nearly five-year tenure as operator of Kenai Loop, Buccaneer drilled four wells, bringing the field online in January 2012. The company also secured a series of gas supply agreements and increased production. The field was the only producing asset the company owned in Alaska, nestled among an ambitious portfolio of exploration projects that pushed the company into financial straits and then bankruptcy.
Although Buccaneer regularly touted drilling opportunities it hoped to pursue, AIX Energy is more skeptical. A third party evaluation by geophysicist Scott Daniels in 2015 found no drilling opportunities on the existing development lease, according to AIX.
Of the four wells, only two are currently producing. A February 2015 deliverability test determined that the two producing wells could produce 15.8 million cubic feet per day, which is sufficient to meet current contractual commitments, according to the company.
Kenai Loop production has been stable in recent years. At the start of 2014, the field had produced some 4.8 billion cubic feet of natural gas, according to the Alaska Oil and Gas Conservation Commission. By the start of 2015, cumulative production had increased approximately 3.3 bcf to a total of more than 8.1 bcf. By the start of this year, total production had increased approximately 3.6 bcf to approximately 11.7 bcf.
In the first half of 2016, Kenai Loop produced some 1.7 bcf. If the field produces at a similar rate in the second half, it would be a slight decline from 2015.
Restoring wells
AIX Energy spent much of 2015, its first year as field operator, handling administrative and regulatory matters relating to the acquisition, as well as some operational matters such as removing the dry solids from the Buccaneer-operated West Eagle No. 1 exploration well that the former operator had been storing at the Kenai Loop drilling pad.
Over the next year, according to a plan of development filed in early May 2016, AIX Energy plans to install gas compression in order to meet contractual requirements and maximize reserve recovery, and is considering plans to re-perforate an existing well and return a suspended well to production to improve deliverability at the field.
The company believes the gas compression will be necessary within the next year and is currently considering whether to lease or buy a system and whether to use gas-powered or electric power compression. As part of those evaluations, the company is also considering whether or not to return the existing Kenai Loop No. 1-4 well to production “to provide increased deliverability, to provide redundancy to meet firm gas sales obligations and to possibly increase ultimate recovery,” according to the company.
Buccaneer Energy drilled Kenai Loop No. 1-4 in October 2013. The well tested at 2.5 million cubic feet per day but later proved to be producing from the same reservoir as the Kenai Loop No. 1-1 well. Kenai Loop No. 1-4 currently monitors reservoir pressure.
Along similar lines, AIX Energy is considering whether to re-perforate the existing Kenai Loop No. 1-3 well to improve deliverability and the company believes there is a “high probability” it will undertake the project sometime during the next 12 to 18 months.
AIX Energy is also evaluating alternatives for disposing of water produced during drilling operations. According to the company, water disposal is currently the second highest lease operating expense at the field, after personnel. In 2015, the company made a cost-benefit analysis of installing an onsite evaporator. Although the project seemed to promise some “modest benefits,” the company is now considering third-party services.
Contract extension
Although AIX Energy generally remains quiet, the company occasionally states its opinions in regulatory hearings, both for contracts and also for wider Cook Inlet issues.
Toward the end of 2015, Chugach Electric Association asked regulators to extend its existing natural gas supply agreement with AIX Energy by eight years, to March 31, 2024, with the possibility of an additional extension through March 31, 2029.
The contract would allow Chugach to purchase as much as 3 bcf per year from AIX Energy but would not require either side to commit to buying or selling gas.
Instead, the two companies would negotiate each individual gas transaction on a case-by-case basis with a price cap rising by approximately 2 percent each year. The maximum price would increase from ranging from $6.13 per thousand cubic feet in 2016-17, to $7.17 per mcf in 2022-23, to $8.07 per mcf in 2028-29.
AIX Energy has also negotiated supply contracts with Enstar Natural Gas Co.
In addition to its supply contracts, AIX Energy publically advocated for an extension of the federal export license for the Kenai liquefied natural gas export terminal.
“In addition to operating producing gas wells, AIX holds exploration leases in the Cook Inlet area. Future development and exploration decisions are dependent upon the assurance of market demand for AIX’s future natural gas production. Accordingly, AIX stands in support of the continued export of LNG from the Cook Inlet Basin,” AIX Energy LLC Manager Fred Tresca wrote in a June 25, 2015, letter to federal officials.
And the company was one of many players in the region to intervene in a rate case for the Kenai Beluga Pipeline. The regional pipeline was requesting a substantial tariff increase.
Over the past two years, AIX Energy has significantly increased its land holdings in Alaska. The company held 1,049 acres of state leases as of April 2015 and approximately 8,882 acres as of May 2016. The company also holds Alaska Mental Health Trust leases.
AIX Energy acquired two leases - ADL 393033 and ADL 393035 - in the vicinity of the Kenai Loop field during a May 2015 lease sale. In January 2016, the company acquired 100 percent working interest and 80.25 percent royalty interest in two Cook Inlet leases from Buccaneer. One lease - ADL 391609 - is west of the existing Nicolai Creek unit and was previously known as the West Nicolai Creek prospect. The other lease - ADL 391611 - is an offshore lease just west of the existing North Cook Inlet unit.
