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Cosmo producing; oil from startup well trucked to Nikiski refinery
In a presentation to the Alaska House Rules Committee on May 11 Benjamin Johnson, president and CEO of BlueCrest Energy, confirmed that oil production from the company’s Cosmopolitan oil field began in April as had been planned. The field, which lies under Cook Inlet, offshore Anchor Point in the southern Kenai Peninsula, is being developed using extended reach drilling from an onshore drill site, where the field production facilities are located.
“Just last month we began the very first sales of oil from a new Cook Inlet field in 15 years,” Johnson said. “We’re currently producing from an existing exploratory well, but the main production will come when we bring on the new wells that we will begin drilling in the second half of this year.”
Trucked to Nikiski Oil is being delivered from the field by tanker truck to Nikiski, where BlueCrest is selling the oil to Tesoro Corp. for use as part of the feedstock for Tesoro’s Kenai Peninsula refinery. Johnson said that BlueCrest has completed construction work at the field and is currently running final operational tests. At the moment the single production well is choked back, producing several hundred barrels of oil per day, while BlueCrest tests all of the equipment at the field, Johnson said.
The company is bringing in what it characterizes as the most powerful drilling rig in Alaska for the directional drilling of the extended reach wells needed to penetrate the offshore reservoir location and hence complete the field development. Drilling should start by July, Johnson said.
Johnson explained that Cosmopolitan actually involves two separate and distinct development projects: an oil development, which is now coming to fruition, and a natural gas development, which is awaiting a development decision. The oil and gas reservoirs are separate and not connected, with the oil below the gas. The oil can be developed from onshore using directional drilling. But, because the gas is at relatively shallow depths, it will need to be developed and produced from offshore.
“The gas development is now on hold due to uncertainty in long-term market demand and future tax credits, but development of the deeper oil reservoirs is more straightforward,” Johnson said.
A long time in coming It has taken 49 years and six different operators to finally bring Cosmopolitan on line - the discovery well, the Starichkof State No. 1 was drilled in 1967. ARCO, which took up Cosmopolitan exploration in the 1990s, morphed into Phillips and then ConocoPhillips. Phillips drilled the Hansen No. 1 well into the prospect, and in 2003 ConocoPhillips drilled the Hansen No. 1A sidetrack. ConocoPhillips later passed the Cosmo baton to Pioneer Natural Resources, which conducted further sidetrack drilling, fracture stimulation and flow testing. In 2011 Pioneer relinquished and sold its Cosmopolitan leases, with BlueCrest and Buccaneer Energy eventually acquiring leases for the field. In 2013, using the Endeavour jack-up drilling rig, Buccaneer drilled the Cosmopolitan No. 1 delineation well. Ultimately BlueCrest acquired Buccaneer’s interests in the field and became field operator. The field was unitized in August 2015.
BlueCrest has commented that the offshore Cosmopolitan No. 1 well, being vertical, had penetrated the field’s relatively shallow gas resources, demonstrating gas sands at depths ranging from 800 to 5,400 feet. Apparently the well also encountered shallower oil-bearing horizons than had previously been discovered.
Importance of tax credits Johnson said that state tax credits are enabling BlueCrest to continue drilling during a period of low oil prices and that, should the tax credit program be suspended, the company would probably be forced to stop drilling, with the loss of some 300 Alaska jobs. Then there would be costs associated with restarting the drilling program, thus driving a need for yet higher oil prices to justify the cost of new wells, he said.
But “these wells represent low risk and high reward for the state,” Johnson said.
Assuming that a well costs $40 million to drill, the state’s well lease expenditure tax credit would amount to $15 million. At any oil price above $24 per barrel the state would make a net profit, based on the royalties from the oil production and assuming a lifetime production of 5 million barrels per well, Johnson said. And at a $60 oil price, the return to the state per well would be $38 million in royalties. Any future production taxes levied on Cook Inlet oil would add to these gains, he said.
Moreover, having entered into contracts and other commitments to at least the end of this year, based on current tax law, receiving tax credits for committed investments is vital to BlueCrest’s survival, Johnson said. The timing of any tax changes is particularly important, given that the company had determined how long it would take to complete the Cosmopolitan development and reach a point of self sufficiency.
“This was a large project for our company and we very carefully mapped out a plan for how we would pay for development,” Johnson said. “We’ve done all this work and we’ve spent all this money and we’re relying on the existing credits based on the laws that were in place when we entered into our financial commitments.”
Cook Inlet oil has particular value to the state because of the lower cost of oil production infrastructure than on the North Slope, and because the oil is used in state, Johnson commented.
- ALAN BAILEY
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