Producers 2016: Furie taking small bites at big unit

Independent follows Kitchen Lights startup with small development plan to bolster production

ERIC LIDJI

For Petroleum News

After more than a decade of work by itself and forerunners, Furie Operating Alaska LLC brought the Kitchen Lights unit online from the Julius R platform in November 2015.

The startup was a major milestone for the company and also for Cook Inlet. The last offshore platform installed in the region was the Osprey platform, back in 2000.

Bringing the unit online, though, is only the beginning.

At 83,394 acres, the Kitchen Lights unit is by far the largest in the Cook Inlet basin, combining at least three previously distinct offshore prospects into a single administrative entity. Furie is in the early stages of figuring out how to develop such a large area, which includes oil and natural gas prospects in different places and in different formations.

Furie spent 2014 and 2015 securing financing for its project and installing the Julius R platform and the associated subsea pipelines to connect to existing onshore facilities.

Earlier this year, Furie launched a four-well development program in the vicinity of the existing KLU No. 3 well. Although KLU No. 3 provided the justification to sanction the Kitchen Lights development, the well cannot effectively drain the entire reservoir or reach the production and deliverability targets to make the project economically viable.

A development program approved by state officials in May 2016 called for Furie to drill two wells during the current open-water season and two more wells in 2017 and 2018.

The Alaska Oil and Gas Conservation Commission issued drilling permits for the Kitchen Light Unit A-2 and Kitchen Light Unit A-1 wells in June 2016. By early September, Furie had completed KLU A-2 and was preparing to start KLU A-1.

The company had also changed its schedule. The plan now calls for splitting KLU A-1 operations over two seasons - starting the well this year and completing it next year. It also calls for completing the Kitchen Light Unit A-3 development well next year.

The shift allows Furie to balance contractual obligations and development goals.

With KLU 3 production currently meeting existing contracts with Homer Electric Association Inc. and Aurora Gas LLC, and KLU A-2 providing an insurance policy for any operational problems, Furie decided it couldn’t justify the cost of completing another well this year. The proposed KLU A-1 and KLU A-3 wells would prepare Furie to meet the 2018 start date for a contract with Enstar Natural Gas Co.

Supply and demand

The existing subsea pipeline connecting the Julius R platform to onshore facilities can handle as much as 100 million cubic feet per day, and while Furie previously proposed an initial production target of 85 million cubic feet per day, the company has also proposed eventual construction of two 100 million cubic feet per day pipelines, suggesting bigger ambitions. The Homer Electric contract requires Furie to produce between 12 million and 18 million cubic feet of gas per day and the Enstar contract requires between 10 million and 22 million cubic feet per day - for a range between 22 million and 40 million cubic feet per day with additional supplies required to satisfy the smaller Aurora Gas contract.

Increasing production will require Furie to increase both supply and demand.

As far as supplies are concerned, the Kitchen Lights unit has four exploration blocks: North, Corsair, Central and Southwest. The current development from KLU No. 3 targets about 300 acres within the Corsair block. In a plan of operations submitted to the state in March 2016, the company proposed a schedule for drilling as many as 10 exploration wells at the unit in the next five years to target both oil and gas throughout the unit.

Testifying before the state House Resources Committee in March 2016, Furie Chief Financial Officer David Elder told legislators that Furie had spent some $700 million in Alaska over the past five years and expected to spend another $300 million over the next two or three years. Recovering that investment would take seven to 10 years, he said.

Demand poses a trickier challenge and is one reason development plans for Kitchen Lights have been changing over the past two years. In a March 2015 plan of exploration, Furie said it would complete the KLU No. 3 exploration well as a development well and drill two more development wells in the Corsair block by the end of the 2015 drilling season, but would push completion activities on those two additional wells into 2016.

By the time Furie submitted its third plan of development for the unit, in October 2015, the company had scaled back its drilling program. The new plan called for drilling a single additional development well in 2016, citing “market constraints” through 2019.

The date suggested Furie was waiting for several existing Hilcorp Alaska LLC contracts to expire before attempting to expand in the market. Furie Senior Vice President Bruce Webb clarified the company’s plans in a December 2015 interview with Petroleum News. Rather than drill two wells in 2016 and complete those wells in 2017, he explained, Furie decided it was wiser to drill and complete one well in 2016 and a second well in 2017.

With the Homer Electric contract starting in April 2016, Furie wanted to bring a second well online as soon as possible to backstop KLU No. 3, which was producing some 18 million cubic feet per day by early 2016. After announcing its three-year contract with Enstar Natural Gas Co., Furie accelerated its development plans, saying it would drill two more gas wells this year and two additional wells between April 2017 and October 2018.

To assist with that development program, Furie decided to replace the Spartan 151 jack-up rig with the larger and more powerful Randolf Yost rig from Shelf Drilling Inc. In addition to being safer and more cost-effective, the Randolf Yost rig is capable to drilling deeper wells, allowing Furie to eventually test intervals in the upper Jurassic formation.

To justify any additional drilling, Furie needs assurances of additional markets to purchase increased gas production. Hilcorp currently supplies much of the utility market in Southcentral. While other options exist, such as liquefied natural gas exports and potential industrial applications, they are currently less dependable than utilities.

In addition to competing against the dominant producer in the region, Furie is competing against a group of smaller producers such as AIX Energy Inc., Aurora Gas and Glacier Oil & Gas Corp. BlueCrest Energy is also looking to pursue gas production in the region.

The expected growth in production has placed the Kitchen Lights unit in the middle of a larger battle of transportation infrastructure in the Cook Inlet region. In June 2016, the company confirmed that it was in the early stages of a plan to build a bypass pipeline to reach the Homer Electric Association power plant in Nikiski without having to use the existing Kenai Beluga Pipeline, which could alter tariff rates on the major pipeline.