Providing coverage of Alaska and northern Canada's oil and gas industry
December 2016

Vol. 21, No. 50 Week of December 11, 2016

BlueCrest drilling ahead

New rig has spudded well at Cosmopolitan; AIDEA OKs loan modifications


Petroleum News

BlueCrest Alaska Operating LLC spudded its first new development well in the company’s Cosmopolitan oil field on Nov. 28, John Martineck, president and CEO of BlueCrest Alaska, has told Petroleum News. In April the company started producing oil from the field, using a converted exploration well, but is now using a new powerful rig to directionally drill from an onshore pad into the field’s offshore oil reservoir. The well should go into operation around the end of March, Martineck said.

The Cosmopolitan field lies under Cook Inlet near Anchor Point in the southern Kenai Peninsula

BlueCrest obtained financial assistance in the form of a $30 million loan from the Alaska Industrial Development and Export Authority as part of a cost of some $40 million to acquire and assemble the drilling rig. During its Dec. 1 meeting the AIDEA board approved some modifications to the terms of that loan, following a delay in the original planned timeframe for the drilling start, and following the deferral in the payment of state tax credits to BlueCrest.

Up to five wells

A plan of development that BlueCrest filed recently for the field indicated an intent to drill up to five wells at Cosmopolitan, with two of those wells being laterals from the well bores of other wells. The concept is to use directional drilling to target the offshore reservoir at a depth of some 7,000 feet and then to drill horizontally through the reservoir. The resulting well bores will have measured depths of up to 24,000 feet, an exceptional drilling distance that requires an exceptional rig. In September Benjamin Johnson, president of BlueCrest Energy, told the Alaska Oil and Gas Congress that the rig has a 750-ton top drive and a 7,500-pounds-per-square-inch drilling mud system.

Given the compartmentalized nature of the field reservoir, a typical characteristic of Cook Inlet oil and gas fields, BlueCrest is going to conduct multi-stage fracking in its wells, to open up the barriers within the reservoir, so that oil can flow to the well bores. Martineck said that the reach of the fracking would extend about 220 feet out from the well bores. The first well would involve about 16 frack stages, with multiple stages being conducted together - it would be unlikely to be necessary to frack more than 20 stages in any of the wells, Martineck said.

There is an ample supply of water for the fracking from local state-approved sources and there are several facilities in the region where the waste fracking fluids can safely be disposed, Martineck said. Apparently each frack stage will require some 1,780 barrels of water.

Conventional oil field

Despite the use of fracking techniques similar to those used for the development of shale oil elsewhere in North America, the Cosmopolitan field is a conventional oil field, not a shale oil play: The fracking will open up the oil communications within the reservoir rather than enticing oil from an impermeable oil-bearing rock. And, so, rather than having to regularly drill and frack new wells to entice more oil out of the subsurface, as in a shale-oil situation, each of the limited number of Cosmopolitan wells will be produced in a traditional manner over an extended period of time. In fact, hydraulic fracturing has been used quite frequently for improved field reservoir performance in both the Cook Inlet basin and in oil fields on the North Slope.

BlueCrest is trucking oil from the onshore production pad for Cosmopolitan up the Sterling Highway to the Tesoro oil refinery at Nikiski. Given the oil production rates from the well that started operation in April, a truck, holding between 315 and 320 barrels of crude oil, only has to traverse the highway once about every couple of days, Martineck said. However, the frequency of truck movement will increase as more wells come on line. The new development well will probably have initial production in the range of 2,500 to 4,500 barrels per day, Martineck said.

AIDEA loan

Under a line of credit from AIDEA, BlueCrest received the balance of AIDEA’s $30 million-loan in July - the company had originally hoped to complete the installation of the drilling rig and start the drilling of its new well in the spring of 2016. But, following delays in the contracting and construction of the rig, the drilling of the well has only just started. And, so, with BlueCrest needing revenues from ramped up oil production to make its loan payments, the company requested, and AIDEA has now approved, a partial deferral of the start of loan payments. The original maturity date of the loan will be maintained.

The new drilling rig acts as collateral for the loan. And, to cover any shortfall between the loan amount and the potential sale value of the rig, the loan agreement required BlueCrest to establish a reserve account of $15 million. BlueCrest had intended to use the proceeds from state tax credits to fund the reserve account. However, with the deferral of credit payments following a payment veto by Gov. Bill Walker, AIDEA has approved a change to the terms of that reserve account. The reserve fund is now set at the greater of $5 million or 120 percent of the difference between the principal outstanding on the loan and the distressed sale value of the drilling rig, but with BlueCrest incurring an unfunded reserve fee.

Many comments

The appearance of the loan change resolution on the board meeting agenda triggered a flurry of comments from members of the public. A number of people expressed strong concerns about potential environmental issues, mainly voicing worries about the perceived risks of conducting fracking operations in the Cook Inlet region. Other concerns include the risk of a tanker truck accident on the highway and questions over putting funding into oil development rather than renewable energy.

Representatives from the oil industry, including Kara Moriarty, executive director of the Alaska Oil and Gas Association, commented that there is a continuing need for oil development; that the Cosmopolitan field is being developed safely; and that oil fields such as Cosmopolitan bring employment and major economic benefits to the state.

During the board meeting, board member Fred Parady commented that AIDEA acts as a financing entity. Assessing environmental risks and concerns is part of the permitting process for a development project, he said.

The Alaska Oil and Gas Conservation Commission oversees the safety of drilling operations in Alaska and in January 2015 updated its regulations for hydraulic fracturing. Recently Bob Shavelson, executive director of environmental organization Cook Inletkeeper, asked for a further change to the regulations - Shavelson wants a public hearing to be held whenever hydraulic fracturing is proposed for stimulating production in a well. The commission is holding a hearing on the request on Dec. 15.

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