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Cosmopolitan in default
Part 1 of 2: DNR pushes for gas development, offers cure for default
Kay Cashman Petroleum News
On May 23, John Martineck of BlueCrest Alaska Operating was sent by certified mail a notice of default for the Cook Inlet Cosmopolitan unit from Commissioner John Boyle of the Alaska Department of Natural Resources.
The default was due to BlueCrest's failure to meet the commitments in the DNR Division of Oil and Gas's Dec. 9, 2024, decision approving with conditions the 11th Plan of Development for Jan. 1 through March 31, 2025.
Since that time BlueCrest has requested, and DNR has allowed, suspensions of the POD period to provide maximum flexibility to facilitate fulfilling those conditions.
BlueCrest can cure the default through completion of commitments. The primary objective and expectation of the state remains that funding is secured to "expeditiously bring development" of the Cosmopolitan unit, or CU, forward "to meet the energy needs of Alaskans," with emphasis on natural gas.
Discovery, early work Cosmopolitan was discovered by Pennzoil in 1967 when it drilled the Starichkof State #1 on ADL 18790. This well was certified as capable of producing in paying quantities and shut-in pending permanent production equipment.
The Alaska Oil and Gas Conservation Commission deemed the well plugged and abandoned on Jan. 19, 2010.
On Feb. 10, 2025, the division decertified the well.
In the mid-1990s, Atlantic Richfield Co. began investigating the original Cosmopolitan prospect, explored the area and acquired additional working interest ownership.
Phillips then purchased ARCO Alaska.
In 2001, Phillips formed the CU, which included seven state leases and two federal offshore leases. Phillips completed the Hansen #1 well, reconfirming the presence of hydrocarbons in the same Starichkof interval as the exploration well and confirming hydrocarbons in the Hemlock reservoir.
In 2003, ConocoPhillips sidetracked the Hansen #1A into ADL 384403 and produced a total of 14,851 barrels of medium gravity oil. The well was certified as capable of producing.
In 2005, Pioneer Natural Resources joined ConocoPhillips as a WIO and obtained approximately 40 miles of 3D seismic over the CU.
In February 2011, Pioneer voluntarily terminated the CU, retaining ADLs 18790 and 384403, which were held by certified wells.
Buccaneer, BlueCrest Energy In late 2010, Buccaneer Alaska and BlueCrest Energy began negotiations with Pioneer to jointly acquire both of Pioneer's leases.
In 2013, Buccaneer and BlueCrest drilled the Cosmopolitan State #1 in ADL 384403 from offshore. The well discovered numerous oil and gas zones within the Upper and Lower Tyonek (above the Starichkof and Hemlock).
The 2011 Cook Inlet Areawide lease sale offered tracts 784, 786, and 804 just north of Anchor Point as a bundle with provisions for higher bonus bids, an increasing rental schedule and specified work commitment under a 5-year primary term, based on known hydrocarbon accumulations and the need to promptly deliver these to market. These tracts were won by Apache Alaska.
BlueCrest acquired 100% working interest in Apache's leases as well as the other former Cosmopolitan leases in 2014.
The state approved the CU agreement and BlueCrest as unit operator on June 26, 2015.
The unit has sustained production since March 2016.
Since unit formation, BlueCrest has drilled five additional wells.
The company drilled its first two wells, the H-144 and H-165 in 2017, then applied for, and was granted on Aug. 29, 2017, the combined Starichkof Sand and Hemlock Formation Participating Area, or SHPA.
The areal extent of the SHPA was defined by the potential drainage area of both "planned and drilled wells."
The SHPA includes portions of four leases and covers 3,450 acres.
On Sept. 11, 2017, the division approved a voluntary contraction of the CU down to these four leases covering 13,314 acres.
Since then, BlueCrest has drilled three additional oil wells from onshore, with the last one coming online in March 2019.
To date, all Cosmopolitan oil and associated gas production from within the SHPA is primarily attributable to portions of ADLs 34403 and 18790. The remainder of the SHPA is not known to contribute to any CU production, and wells drilled to date are not capable of producing hydrocarbons outside the PA.
2024, 2025 PODs On Dec. 5, 2023, the division approved BlueCrest's 2024 POD, in which BlueCrest committed to maintain production in 2024, to drill one oil well in 2025, and to provide a fully defined plan for Tyonek gas development as part of the 2025 POD submission, with gas production expected in the second quarter of 2027.
These commitments were meaningful to the state because of the need to secure natural gas supplies to meet in-state needs.
The 2024 POD approval also required the company to update the division in writing on progress no later than June 30, 2024, with a June 17 follow-up describing the division's expectations for the update and listing questions including: whether BlueCrest has obtained the financing for drilling an oil well in 2025; whether BlueCrest has obtained the financing to advance Tyonek gas development; whether there is a fully defined plan and schedule for Tyonek gas development; and whether the financing and plans are sufficient to meet the need to deliver sustained gas production in 2027, per the POD approval.
BlueCrest provided a one-page update on June 28, 2024, explaining that it had neither obtained financing for drilling an oil well in 2025 nor obtained the financing to advance Tyonek gas development.
On Aug. 26, 2024, the division notified BlueCrest "that its June 28 update failed to adequately answer the specific questions" and asked BlueCrest to promptly provide the detailed information requested by the division -- including specific responses to each of the four questions.
BlueCrest responded on Sept. 23, 2024, addressing the specific instruction and provided a technical presentation to the division on Sept. 24, 2024.
Additional details were provided during a technical meeting held on Dec. 4.
After a detailed technical review, the division explained that BlueCrest's concept for Tyonek gas development was both "unrealistic and stale" due to its inability to secure financing by November 2024.
Specifically, the deadlines and critical path items that would be necessary to achieve the steps identified in BlueCrest's plans to facilitate the development would have had to already have occurred by the time the meeting took place.
AIDEA loan To ensure that the development obligations associated with the unit and leases were fulfilled, the division approved BlueCrest's proposed 2025 POD for the limited period from Dec. 31, 2024, through March 31, 2025, and imposed the following conditions:
(1) Absent fully committed private funding for both projects, BlueCrest shall apply for and secure a loan with the Alaska Industrial Development and Export Authority to obtain funding for the full development of the Tyonek gas project and provide progress on AIDEA approval.
(2) BlueCrest must provide the division with evidence of binding commitments from private investors to fund the Tyonek gas project by the end of the 2025 POD approval period.
(3) If BlueCrest does obtain funding for the Tyonek gas development project in a timely manner, then it shall submit a realistic project schedule with a date of first gas production acceptable to the division.
(4) BlueCrest shall, beginning no later than Jan. 31, 2025, update the division monthly on the status of securing financing for gas development; and
(5) BlueCrest shall submit an application to contract the SHPA.
In the decision, the division stated, "If portions of the SHPA are proven to be unproductive, or after a reasonable amount of time they are not developed, the Division expects BlueCrest will apply to adjust the SHPA boundary. If BlueCrest does not act in a prudent manor the Division may require increases in the rate of development as described in Article 9.7 of the Cosmopolitan Unit Agreement." BlueCrest has been given "a reasonable amount of time and has not continued drilling efforts required to maintain the entirety of the SHPA. Therefore, the Division is directing BlueCrest to contract the SHPA boundary based on existing well drainage radius. BlueCrest must submit this contraction application by Jan. 31, 2025."
The division further stated that "if BlueCrest is unable to meet all of these conditions, the Division will have no other option than to place" the CU into default.
BlueCrest provided its written acceptance of the division's conditional approval of the 2025 POD on Dec. 19, 2024. In its written acceptance, BlueCrest both requested an extension of time to Sept. 30, 2025, to address contraction of the SHPA and asserted various facts to which the division responded on Dec. 31, 2024.
BlueCrest asserted that (1) there are limited available gas storage reservoirs that could contain the large volumes of gas that would be produced from the CU Tyonek reservoirs over a multi-year period; and (2) there is insufficient market demand for the CU Tyonek gas supply, so any CU Tyonek gas development prior to 2030 would be premature and financially imprudent.
The division told BlueCrest that it "has been in communication with multiple operators in the Cook Inlet region with interest in converting depleted gas fields, near their economic end of field life, into gas storage within the next 2-3 years," and that "these depleted fields represent enough capacity to handle and store the volumes proposed by BlueCrest."
Furthermore, multiple Southcentral Alaska utilities have publicly said they currently have uncontracted volumes of natural gas demand that will grow dramatically in 2028, and nearly all existing utility contracts expire in 2033 and cannot be extended.
Finally, the existing oil development as well as any future oil development from Cosmopolitan is dependent on natural gas as a fuel for continued operation.
The division said these factors show that significant gas development prior to 2030 would be prudent, noting that Enstar told the Legislature that current gas production would not meet demand by 2028, but if known accumulations were developed, along with supplemental gas storage, supply not meeting demand could be pushed off to 2032.
The division said those known gas accumulations include those in the CU and reminded BlueCrest of its commitments in the approved 2024 POD to bring the "Offshore Gas Project on production by the end of 2nd Quarter of 2027"; the same commitment made in the proposed 2025 POD.
Finally, the division approved the request for extension regarding contraction of the SHPA and directed BlueCrest to provide a technical presentation no later than June 30, 2025, to justify the current boundary of the SHPA.
At this time, per the division, "BlueCrest has failed to fully advance the development of oil and gas resources within the current boundary of the SHPA and completely failed to explore or develop known accumulations of gas resources associated with the Tyonek formation outside of the SHPA. This has become acute over the last several POD cycles, despite the Department's clear explication of the public necessity and market demand for the development and repeated flexibility to accommodate BlueCrest's stated commitments."
Particularly, BlueCrest has failed to comply with POD conditions it accepted that identified its lack of fulfillment would be grounds for default.
Curing default The default can be cured by meeting requirements needed to bring the development of CU resources forward.
In part because there has been no material change in circumstances by BlueCrest to advance gas production from the CU, "DNR hereby provides notice of default. DNR further provides BlueCrest with the opportunity to cure under 11 AAC 83.374(b)."
To cure, by Aug. 21, 2025, BlueCrest shall:
(1) Provide the division evidence of fully committed, binding private funding for both H10 well and Tyonek gas projects and if that funding is obtained then BlueCrest shall, within a reasonable period, also submit a project schedule with a firm spud date commitment to both production from the H10 well and delivery of first Tyonek gas production.
(2) The division requires bi-monthly updates on progress on obtaining financing for the Tyonek gas project, and updates on operational progress.
(3) A technical presentation is required no later than June 30, 2025, to justify the boundary of the SHPA.
To fully cure default, BlueCrest must satisfy each of the above-listed requirements within 90 days. If BlueCrest fails to cure this default by Aug. 21, 2025, DNR will pursue either unit contraction under 11 AAC 83.356(e) or unit termination in accordance with 11 AAC 83.374.
As described in prior PODs, the state is in critical need of the prompt development of all natural gas resources in the Cook Inlet. If requested by BlueCrest, the division will also evaluate reasonable alternative efforts that have the same ultimate effect of bringing BlueCrest's Tyonek gas horizons into production as soon as possible.
Such efforts might include farm-out agreements, lease assignments, joint ventures, or other arrangements with other operators that are technically and financially capable of bringing Tyonek gas to production by the end of second quarter 2027, or as soon as practicable thereafter. The department will evaluate such proposals for their achievability and timelines as they related to gas development in light of the commercial market demand and public need for natural gas supplies.
The division approved BlueCrest's proposed 12th POD with conditions.
See details in part 2 of this story in next week's issue.
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