Apache calls it quits
Large independent suspends exploration activities after nearly six years
For Petroleum News
Apache Corp. is suspending its Alaska operations.
The large Houston-based independent said it would discontinue its exploration program in the state as part of companywide cuts, according to a spokesperson.
“Due to the current downturn, Apache has had to significantly scale back operations and spending. We recently reduced our spending plans for 2016 by 60 percent from 2015 levels and are focusing our limited dollars on specific international opportunities and strategic testing in North America,” the spokesperson said in an emailed statement. “Operations we are suspending as a result of the downturn include our Alaskan activities.”
Over the past year, Apache had been resuming its ambitious seismic program in Cook Inlet and permitting three drilling pads within the Kenai National Wildlife Refuge in preparation for a potential exploration program at some undetermined point in the future.
Currently, Apache is leasing nearly 407,000 acres from the state of Alaska and at peak held some 800,000 acres altogether, including leases from federal, Native and other landowners. The company will allow its acreage to expire over the coming year and has no plans for the exploration well it drilled several years ago.
Between 2011 and 2014, Apache Alaska Corp. collected some 1,100 miles of seismic information in the Cook Inlet and drilled one exploration well, according to the company.
OptimismIf the “current downturn” was really to blame, it was merely the last push.
Apache faced both internal and external obstacles over the past six years, as it pursued an ambitious agenda to revive and possibly expand oil production in the Cook Inlet basin.
When Apache announced plans to enter Alaska, optimism went in two directions.
State officials were thrilled at the arrival of a company with a reputation for reviving aging oil fields thought to be past their past, such as the Forties Field in the North Sea. In fact, before Apache arrived, rumors suggested the company might buy Prudhoe Bay.
Instead, Apache pursued opportunities in Cook Inlet. The company acquired 196,524 acres in the region from Samuel H. Cade, Daniel K. Donkel and three other independent investors late July 2010 and gradually amassed as much as 800,000 acres from the state and other landowners before refining its holdings. The leasehold stretched across the entire Cook Inlet basin, from the southern Kenai Peninsula to Point MacKenzie and from the east side to the west side and including onshore, offshore and coastal acreage.
Comprehensive seismicAs it had done in other mature basins, Apache launched a comprehensive seismic program in Cook Inlet. The company started with a small, preliminary 2-D seismic survey in early 2011 covering onshore, offshore and “transition zone” targets. The results intrigued the company. “It’s an exploration play but the guys have wowed me enough for me to believe that it’s a real opportunity,” then-CEO Steve Farris said in August 2011.
By that point, Apache had commissioned an ambitious three-year 3-D seismic survey from Susitna Flats to Anchor Point. The timetable and the wireless technology would have allowed Apache to work year round: onshore from September to April, offshore from April to November and in transition zones from September to December and March to May. The first 130 square miles of seismic identified eight new leads, suggesting the potential for as many as 650 potential leads spread across the leasehold.
Apache never claimed to be interested in a short-term investment. “We’re going to operate here for many, many years. We’re on a 25- to 30-year plan for the Cook Inlet,” Senior Commercial Advisor Paul Abokhair told Alaska lawmakers in October 2011.
In June 2012, Apache Alaska General Manager John Hendrix told Petroleum News his company expected to be operating in Cook Inlet “30 years from now.” He added, “You don’t come in and buy this much acreage with a short-sighted plan. We’re not a one-well wonder and we don’t have to bet the farm on one well. … It’s a proven basin and we think it’s been underexplored. But it’s not an easy basin. It’s a very complex basin. It’s very complex to drill and it’s very complex from the geology (standpoint).”
The enthusiasm spread beyond Alaska. Around the same time, in June 2012, Apache Vice President for Exploration and New Ventures John Bedingfield told analysts, “When you go up there, it’s kind of like going back into time. It’s like an oil museum, is kind of how I’d describe it. It’s interesting, but things have just been frozen for 40-plus years.”
Intriguingly, Apache believed there was as much oil yet to be discovered in the basin as has already been produced in the 55 years since the first discovery well in the region.
And the company was continuing to amass interesting prospects, including several leases surrounding the Cosmopolitan field. Because the leases were known to contain significant accumulations, the state had offered the leases at auction with special terms.
PessimismGiven promises of a 30-year timetable, a change in mood took more than oil prices.
In the nearly six years since Apache arrived, the delivered price of Alaska crude oil increased from $76 per barrel to $114 per barrel before falling to some $30 per barrel.
Before prices fell, the company had already lost some enthusiasm for Alaska. The reason was a combination of drilling results, regulatory hurdles and corporate reshuffling.
Apache announced a two-well exploration program in April 2012, after completing an initial 3-D seismic program over onshore sections of its acreage. The company envisioned drilling as deep as 16,000 feet to test beneath the Tertiary strata of the basin.
“We don’t want anybody coming back behind us and saying ‘look what I’ve got,’” Hendrix told Petroleum News in June 2012. “You’re down there. You’re drilling. You might as well go the extra mile, or a thousand feet, or whatever it is.”
The exploration program initially called for drilling the Aspen well on the west side of Cook Inlet in July 2012 and the Captain Boomer well on the east side of Cook Inlet in the fall or winter. As the year progressed, though, Apache decided to focus its drilling activities on the west side, where the majority of its seismic work had occurred. As the year progressed, the company cut the program in half and drilled the Kaldachabuna No. 2 well on Cook Inlet Region Inc. leases near the village of Tyonek in November 2012.
The drilling had problems. The drill bit got stuck several times as the well passed through more than 100 coal seams, many thicker than 10 feet. Apache suspended the well in April 2013 at 11,389 feet, according to Alaska Oil and Gas Conservation Commission records.
“Frankly, we were disappointed in the well results that we had there. We drilled the well and actually got too close to a fault, so we really didn’t evaluate that well,” Farris said in an August 2013 conference call, adding: “I am personally still very positive about the Cook Inlet. Obviously we’re directing cash to different things right now. So, we’ve slowed down that activity but in terms of its prospectivity, I still think it has good value.”
Kaldachabuna No. 2 proved to be the only well Apache drilled in Alaska.
Regulatory troublesAt the same time, the seismic program was going slower than expected.
In early 2012, as Apache prepared to move into more fragile transition zones and offshore regions, a coalition of environmental groups challenged a favorable National Marine Fisheries Service opinion about the potential impacts of the program on beluga whale or Steller sea lion populations. By the time a May 2013 court order upheld a portion of the appeal, the authorization had expired and the parties closed the case.
A delay over a different authorization for a seismic survey in the Kenai National Wildlife Refuge forced Apache to suspend its program in September 2012. Shutting down the $50 million operation cost Apache $10 million and delayed the overall program by at least a year, Apache Alaska General Manager John Hendrix said in February 2013. Even after Apache got the necessary approvals to continue, the company kept the Alaska survey on hold while it pursued more immediately profitable projects in other parts of the world.
Apache received a special use permit from the U.S. Fish and Wildlife Service in July 2013, which allowed the company to launch an onshore survey in the Kenai National Wildlife Refuge in February 2014. A month later, after getting new approval from the National Marine Fisheries Service, the company resumed its offshore seismic survey.
But in testimony before the U.S. House Committee on Natural Resources in May 2014, Cook Inlet Region Inc. Senior Vice President of Land and Development Ethan Schutt said that Apache had downsized a major 3-D seismic program to a smaller, discontinuous 2-D program because of a lack of coordination between federal permitting agencies.
Apache declined to comment on that announcement.
In August 2014, Apache applied for National Marine Fisheries Service authorization for a five-year offshore seismic program starting March 2015. The request covered 1,863 square miles of the upper Cook Inlet, from Kalgin Island to an area west of the northern Kenai Peninsula. The authorization was released for public comment in March 2015.
In December, the company applied for a U.S. Army Corps of Engineers permit to build three gravel pads and associated access roads within the Kenai National Wildlife Refuge.
Through its seismic work to date, combined with other geological work such as studying existing wells, Apache completed predictive regional reservoir maps for the Hemlock and Tyonek formations and was working on maps for the Beluga and Sterling formations as of September 2015, when Hendrix testified before the Alaska Senate Oil and Gas Tax Credit Working Group and advocated on behalf of the existing exploration tax credit system.
Corporate shufflesAs the Alaska seismic program was moving forward, Apache made major changes.
Over the course of 2014, at the urging of investors, Apache sold off some $6 billion in assets and narrowed its focus to unconventional plays in the United States and Canada.
In November 2014, with oil prices having fallen below $80 per barrel, Apache announced a $4 billion budget for its onshore operations in North America in 2015, down from $5.4 billion in 2014. Some analysts believed the company would spend more than its budget, but those predications came when oil prices were still above $70 per barrel. An Apache executive told the Houston Chronicle that the company would be “comfortable … even all the way down to $70.” By January 2015, oil prices had fallen below $50 per barrel.
Apache made no explicit mention of Alaska during a November 2014 event on North American activities, focusing on Canada, Oklahoma, Texas and the Gulf Coast. But executives referenced three unnamed “undercover plays” budgeted for exploration work in 2015. Alaska remained absent from most updates the company made during the year.
In January 2015, Apache replaced its longtime Chief Executive Officer G. Steven Ferris, who had been a vocal supporter of the Cook Inlet program. The company replaced Ferris with John Christmann, who it had recently hired to oversee development of its North American assets, particularly unconventional opportunities in the Lower 48 and Canada.