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XTO plans only offshore Cook Inlet well this year Permian, Cook Inlet basin oil stabilize XTO Energy’s production decline curve; Fort Worth-based independent buys existing fields with complex geology, adds to production, balances quick declining gas wells with longer-lived oil wells Kristen Nelson Petroleum News Editor-in-Chief
The Cook Inlet basin in Southcentral Alaska saw the state’s first modern oil and gas production, with discoveries onshore in the late 1950s and offshore in the 1960s. Platforms were installed in the 1960s and production, supported by development drilling, has been continuous since that time.
While the Alaska Division of Oil and Gas forecasts oil production from offshore Cook Inlet fields could continue to as late as 2019, development drilling is clearly on the wane.
Kyle Hammond, XTO Energy’s vice president of operations, told the Alaska House Special Committee on Oil and Gas April 1 that he has talked with other offshore operators, “and I believe this year … was planned to be the first year in the history of the Cook Inlet” without a well spud offshore.
Since XTO does plan to spud this year, “we’ll continue that string” of continuous drilling, Hammond said.
“But if we drill a well, I think we’re going to be the only operator that drills a well in the Cook Inlet offshore this year.”
Hammond said XTO plans to drill one well, possibly two, from its offshore platforms at Middle Ground Shoal.
Unocal, the inlet’s major operator, has no offshore wells planned this year, spokeswoman Roxanne Sinz confirmed April 6. Ditto for ConocoPhillips, which operates the Tyonek platform at the North Cook Inlet gas field. It completed some workovers at the field last year and early this year, but plans no wells this year, spokeswoman Dawn Patience told Petroleum News.
And Forest Oil, operator of the inlet’s newest platform, Osprey, at the Redoubt Shoal field, said last year that results have been disappointing, substantially reduced its reserves estimates and replaced the drilling rig on the platform with a workover rig. Cook Inlet, Permian balance decline curve Cook Inlet production — onshore and offshore — has declined from a peak of 225,701 barrels per day in 1970 to 29,267 bpd in 2003, according to the 2003 annual report from the Alaska Division of Oil and Gas.
Lindsey Dingmore, Fort Worth, Texas-based XTO’s manager of governmental and regulatory affairs, told the committee that decline curve management is important for XTO and that at its Middle Ground Shoal platforms, which it acquired from Shell in 1998, production is long-lived and, along with oil production from the Permian basin, helps the company balance its quickly declining East Texas gas wells.
XTO is “not really an exploration company,” Dingmore said, but is “the kind of company that the majors look to when they are selling assets” that no longer fit their portfolios, but where a smaller company can come in and do “a lot of the work in terms of in-fill drilling and development.”
“A good acquisition company must be a great development company,” Hammond said, and XTO tries to double reserves at the properties that it buys.
That is about what has happened at Middle Ground Shoal, he said, and as a result, production from the A and C platforms has remained about constant since the company acquired the platforms at Middle Ground Shoal from Shell in 1998. Shell installed the platforms in 1964 and 1967; Unocal installed the other two platforms at the field, Baker and Dillon, in 1965 and 1966.
About 90 percent of XTO’s production is natural gas, Hammond said, and its oil properties in the Permian basin in Texas and in Alaska have flatter decline curves and help balance declines from other areas.
XTO doesn’t buy companies, it buys oil and gas and it looks for “long-lived, high-margin-properties,” he said. The high-margin part of the company’s equation is important, so it can “continue to operate in a low-price environment,” Hammond said. Goal to keep production flat XTO also looks for geologically complex reservoirs. If “it’s very simple, anybody can find it,” but “in geologically complex reservoirs, the probability that the previous operator missed something goes up dramatically,” Hammond says.
Production from the A and C platforms at Middle Ground Shoal is about the same as it was six years ago, which is what XTO wants, he said: “We want to buy properties that as we continue to add capital into these properties, we can keep the decline essentially at zero.”
The platforms, combined, average 3,900 barrels per day, Hammond said.
XTO has invested some $50 million to keep the decline curve flat, and plans to invest between $7 million and $8 million a year for the next several years at Middle Ground Shoal.
Shell had developed the east side of the reservoir at Middle Ground Shoal, he said, “on the east side the rock is significantly better rock, with more oil in place and more permeability — the ability of the oil to flow to the wells — and it’s much easier to drill.” On the east flank, where Shell worked, the structure is “relatively flat.” West flank tipped on end The west flank, where XTO has worked, is on the other side of a major north-south trending fault, and tectonic activity has essentially turned the strata on the west side of the field “on end,” he said, so when XTO drills on the west side, it drills directionally, penetrates the formation, then goes back and penetrates it again on the bottom side of the well.
“The wells are a lot more expensive to drill that way and technically more of a challenge,” Hammond said, “but it’s what makes drilling a well on the west flank economically viable.”
Costs vary from $2-$3 million a well to as high as $7 million, he said. The company has drilled eight wells, including some drilled as injection wells, and has also converted wells to injection to “artificially pressure the reservoir and move the oil to our producing wells.”
That’s another thing the company liked about Middle Ground Shoal: “This is essentially a water flood that’s out under the water. It’s a very similar water flood to what we do in the Permian basin of West Texas,” Hammond said, “it just happens to be in a little bit more challenging environment, but the basic reservoir rocks and the basic water flood is something that this company’s done for years …,” and the field fits well with XTO’s portfolio.
Although, he said, it’s a bit of a challenge to water floor in a vertical environment. Costs going up The Alaska Legislature passed a royalty reduction bill for Cook Inlet properties last year, and Dingmore said XTO’s properties ended up in a category where royalty relief would be applied at 975 barrels.
He said XTO anticipates that it is a few years away from that production level, but said costs are a concern.
Since Unocal has shut-in its Baker and Dillon platforms at Middle Ground Shoal, “that’s caused us to take control of some onshore properties, some pipelines that we were sharing with them,” and thus taking on additional cost.
Average production from its new wells has been 400 barrels per day, but that ranges from zero (one well was a dry hole) to 1,200 bpd, with average reserves per well drilled of 750,000 barrels, ranging from zero to some that are “much greater,” Hammond said.
We like being here, he told the committee, but “one of the things that I try to explain to people is, this reservoir has an inherent risk that does make it very challenging for us to present projects to our management.”
The one, perhaps two, wells the company plans to spud this year will be in the third or fourth quarters.
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