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Vol. 16, No. 16 Week of April 17, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Cosmopolitan leases have special terms in Cook Inlet lease sale

Finding itself in the novel situation of offering some tracts with a known oil resource in its next Cook Inlet areawide lease sale, the Alaska Department of Natural Resources is using some creative approaches to encourage the development of acreage released from the now-defunct Cosmopolitan unit, offshore Anchor Point on the southern Kenai Peninsula, Kevin Banks, director of Alaska’s Division of Oil and Gas told Petroleum News April 12.

“We have an opportunity here … to try something that’s pretty different for us,” Banks said.

In January, following a multiyear program of appraisal drilling and development planning, Pioneer Natural Resources voluntarily terminated the Cosmopolitan unit, having at one time proposed transporting Cosmopolitan oil from Anchor Point by truck to the oil refinery at Nikiski. When announcing the end of its interest in Cosmopolitan the company said that flow tests and engineering studies had indicated a lower resource potential in the prospect than originally thought.

But Banks said that he understands that Cosmopolitan lost out in the competition for capital within Pioneer’s portfolio of development opportunities, with the company focusing on the development of the Oooguruk field offshore the North Slope and the company’s shale oil and gas developments in the Lower 48.

Continuing opportunity

That leaves an opportunity for another company to develop the Cosmopolitan oil, he said.

“We are still pretty optimistic about the prospect here at the division,” Banks said. “It’s a challenge, but there’s one well that could come into production with just a completion. We’re pretty excited.”

And, with a gas line having recently been constructed down to Anchor Point, there is the potential for gas development, either using gas associated with the oil pool at Cosmopolitan, or perhaps from gas sands higher in the geologic section.

However, when Pioneer relinquished the Cosmopolitan unit the company held onto two leases with wells certified as capable of producing oil in paying quantities. And, so, in the areawide lease sale, scheduled for June 22, DNR is offering special lease terms on three tracts adjacent to the Pioneer leases, hoping that another company will pick up the baton of the Cosmopolitan project, perhaps ultimately acquiring Pioneer’s leases or negotiating some other deal with Pioneer.

Pioneer also has a contractual relationship with the surface land owner for the onshore site from where the company had been drilling directionally into the offshore prospect, Banks said.

The division used its knowledge of the subsurface geology at Cosmopolitan to pick the three tracts to offer under special terms, narrowing the acreage to the immediate area of the Cosmopolitan prospect, he said.

Special terms

And, given that the prospect is “on the cusp of production,” albeit also requiring some additional delineation drilling, the division has reduced the lease terms to five years, rather than the customary seven to 10 years, and has placed a requirement for a lease owner to file a plan of exploration within six months of a lease being issued, Banks said. The exploration plan must describe the bottom hole location and depth of wells to be drilled on the lease, with at least one well to penetrate the stratigraphic interval equivalent to the oil reservoir discovered by the Starichkof State No. 1 well. The well penetrating the reservoir must be completed, suspended or plugged and abandoned by the end of the fourth year of the lease, with the lease terminating after five years if the work commitment is not met. That seems a practical timeframe for conducting the drilling, Banks said.

To avoid significant administrative complications that would arise from trying to combine the three tracts and offer them as a single larger tract in the lease sale, the division is offering each tract as a self-contained entity. But, recognizing that the tracts encompass a single, known prospect, the division requires a bidder to bid on all three tracts, rather than piecemeal them.

Work commitment

And, rather than expecting a lessee to have to drill a well in every one of the three tracts, the division will allow the lessee to satisfy its work commitments through lease unitization, when coupled with the formation of a participating area for oil production allocation from any of the leases, Banks said.

Minimum bonus bids on the three tracts will be $50 per acre, as distinct from the $10-per-acre minimum requirement for other tracts in the lease sale. Rental rates for leases on the tracts will be considerably higher than for other tracts, at $50 per acre in the first year and increasing to $500 per acre in year five. However, as an additional incentive to prompt drilling, the rental rates will be dropped down to the statutory rate once the work commitment is fulfilled.

The lessee will also have the opportunity to reduce rental obligations by relinquishing part of the acreage, to focus on the prospect, Banks said.

Legislators have been pressing the division to find new ways of putting leases into production quickly, and this is the division’s first try at an innovative approach to leasing a single prospect involving multiple leases, Banks said. Success in this experiment could lead to new ways of offering state land for lease elsewhere, he said.

Discovered in 1967

The history of exploration in the oil prospect that the division wants to see moved into development goes back to 1967 when Pennzoil Co. found oil and gas at depths of about 6,800 feet and 6,900 feet when drilling the Starichkof State No. 1 well from a jack-up rig offshore Anchor Point. A second well drilled in the same year about two miles from the first well found some gas at 4,000 feet but encountered water in the horizon where the first well had encountered oil. Pennzoil never developed the prospect and the unit containing the wells eventually lapsed.

The Starichkof prospect saw no further action until 2001-02, when Phillips Alaska Inc., later to become part of ConocoPhillips, drilled the 18,000-foot Hansen No. 1 extended reach well from onshore into the prospect, which the company had by then named Cosmopolitan. That well tested oil in fluvial sands of the Hemlock and lower Tyonek formations.

In 2003 ConocoPhillips further tested the prospect by drilling a sidetrack well, the Hansen 1A, to a measured depth of 20,789 feet and a true vertical depth of 7,102 feet.

By that time the Cosmopolitan unit, formed in 2001, consisted of seven state leases and two federal outer continental shelf leases, encompassing a total area of more than 24,000 acres.

More than 500 bpd

However, by 2004 ConocoPhillips, which had been partnering with Forest Oil and Devon Energy in the funding of the Cosmopolitan investigation, was seeking an additional partner to share the cost of further appraisal of the prospect. At the Northern American Prospects Exposition of that year ConocoPhillips advertized the prospect, saying that well tests had demonstrated flow rates greater than 500 barrels per day of 25 degree API oil, with potential for higher flow rates. There was further potential for shallow oil and gas in thin sandstones of the upper Tyonek formation, the company said. The reservoir sands had been laid down in a braided river system in a river basin axial region. The primary target is Hemlock sandstone, with more than 100 feet of net pay, and the secondary target is the Tyonek formation, with more than 130 feet of net pay, the company said. The company also characterized the prospect as a four-way dip closure.

Pioneer Natural Resources bought into the prospect, increasing its initial interest of 10 percent in 2005 to 50 percent in 2006 and becoming unit operator. And in 2005 the working interest owners shot some new 3-D seismic over the prospect. Also in 2005, Tim Dove, Pioneer president and chief operating officer, said that the Hansen wells had tested at a stabilized rate of 600 to 800 barrels a day over different intervals that lasted three to four months.

In 2006 Ken Sheffield, Pioneer’s Alaska president, told the South Central Alaska Energy Forum that the Cosmopolitan prospect has a resource potential of 30 million to 100 million barrels of oil.

Second sidetrack

In 2007, by which time Pioneer had bought out all of the Cosmopolitan working interest owners, the company drilled a second Hansen sidetrack, the Hansen 1A L1. In February 2008 the company announced than an extended test had flowed 400 to 500 barrels per day of oil from the Starichkof zone. The company expressed optimism about being able to develop the field, said that it was planning to start delineation drilling in 2009, was working on field facility design and planned to start development permitting.

A final development decision would depend on the results of the 2009 delineation drilling, the company said.

But then came the 2008 world financial crisis, along with tumbling oil prices and general economic uncertainty. Pioneer elected to protect its financial position through drastic cuts in its drilling program, with the planned 2009 drilling at Cosmopolitan becoming one of the casualties.

In 2009 Pioneer started signaling the possibility of renewed drilling activity at Cosmopolitan in 2010, and in development plans submitted to state and federal regulators in 2010 the company indicated the possibility of producing peak rates of 8,000 barrels of oil per day from the field.

But all came to naught in January 2011 when Pioneer elected to terminate the Cosmopolitan unit, having decided to invest its exploration and development capital elsewhere.

—Alan Bailey

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