THE INDEPENDENTS 2003: Unocal Alaska scales back in 2003

Major-turned-independent cuts workforce by 18%, budget by 50%, searching for onshore gas

Kay Cashman

Petroleum News

Unocal Alaska, which made its first Cook Inlet basin gas discovery in 1959, is dealing with the challenge of maturing fields in the Southcentral Alaska basin. The largest oil and gas producer in the inlet, Unocal scaled back spending in 2003, a move the company said reflected declining resources and few opportunities for finding additional reserves.

When the major-turned-independent laid off 18 percent of its 450-person workforce at the end of 2002, Unocal said it was “implementing a comprehensive restructuring program to improve Cook Inlet business profitability.” That restructuring included a reduction in capital investments, elimination of duplicate services, shutting in certain facilities and streamlining operational, technical and support functions.

Unocal’s 2003 capital budget for Alaska was set at $35.5 million, the same amount the company spent in 2000, but half of what it spent in 2001 and 2002.

The company also suspended operations at its Dillon and Baker platforms in Cook Inlet in late 2002 and early 2003, respectively. The company is betting on the Kenai Peninsula’s smaller natural gas fields to help stem the tide of falling production, Charles Pierce, Unocal’s top executive in Alaska, told Petroleum News in a June interview.

“Our growth area is in onshore gas exploration,” he said. “We are focusing near-term growth efforts towards onshore gas in Cook Inlet,” as opposed to offshore oil and gas exploration in the inlet where Unocal still operates eight platforms.

Three objectives in Cook Inlet

The first is to manage the existing Cook Inlet oil fields over the next five to 15 years. He said although they are declining, Unocal will continue production as the end of the field life draws closer, approaching old fields with new technology, the best example of which is the company’s successful 2001 redrill at the King Salmon platform in the McArthur River field in the Trading Bay unit. The K-13 well produced at the highest rate of any well in Cook Inlet history, coming in at 8,000 barrels of oil per day.

“We have to be disciplined in investing in older properties,” Pierce said. Unocal is planning for the eventual abandonment and remediation of some of its older facilities, although a company spokesman said no more platform suspensions were planned through the end of 2004.

Second, Unocal will continue streamlining efforts to create a smaller work scope. Pierce said it’s all part of the move away from offshore oil to onshore gas. Smaller is more profitable, he said.

And third, Unocal will fit into its new svelte look by taking on selective projects with existing infrastructure. Pierce said the company will continue Cook Inlet exploration projects on the southern Kenai Peninsula and in the Ninilchik unit, despite the fact the company drilled three wells south of Ninilchik in 2002 that came up dry.

Following are the highlights of Unocal’s Cook Inlet basin activities in 2003.

• In May, the company took two tracts on the southern Kenai Peninsula for $60,652.80 in the state’s Cook Inlet area-wide oil and gas lease sale.

• In early June, Unocal spud its Happy Valley No. 1 gas exploration well in its Deep Creek unit near Ninilchik. It followed immediately with a second well in the same unit, leading to rumors of a gas discovery. (See update in On Deadline section.) The 22,617-acre Deep Creek unit is the larger of two exploration units Unocal has on the southern peninsula. The other, the 6,998-acre South Ninilchik unit, is adjacent to the Marathon Oil-operated Ninilchik unit.

• On June 25 the state of Alaska approved an expansion of the Unocal-operated Trading Bay unit in Cook Inlet and expansion of the unit's Hemlock oil pool participating area and its Grayling gas sands participating area.

The state said two wells drilled in recent years established oil production outside of the unit boundary, one of which produced at initial gas-lift test rates of more than 3,000 barrels of oil per day. Unocal's 39th plan of development for the unit includes optimizing oil recovery from the Hemlock, Middle Kenai and West Foreland participating areas within completed wells and studying potential workover or redrill opportunities.

The division said Unocal is also considering rig projects on the Steelhead and Grayling platforms to improve deliverability and recovery of gas reserves from the Grayling participating area and will “continue to evaluate the possibility that oil reservoirs exist within the Jurassic section within the unit.

On Oct. 27 Unocal Alaska spokeswoman Roxanne Sinz told Petroleum News the company had “started workover operations on the Steelhead this weekend (Oct. 25-26). We will be doing three workovers and one redrill for gas deliverability. At this time no Jurassic projects are envisioned.”

• On Aug. 2, Unocal received the Director's Corporate Wildlife Stewardship Award from the U.S. Fish and Wildlife Service for “outstanding efforts toward protecting the invaluable wildlife resources of the Kenai National Wildlife Refuge.”

Fish and Wildlife said Unocal “has diligently worked to combat the deterioration if its aging facilities.” Unocal began a program in 1995 of replacing old metal pipelines with heavy duty metal, fiberglass and sometimes plastic piping and sleeves, and has removed 6,780 tons of scrap, steel, used pipe and cement from the field.” The effort included the disassembly and removal of an old tool house, six 750-barrel-gauge tanks from tank setting sites and “numerous pieces of outdated equipment.”

• In late August the newly constructed Kenai Kachemak Pipeline received approval from the Regulatory Commission of Alaska to begin transporting natural gas starting Sept. 1. Construction of the pipeline, owned 60 percent by Marathon and 40 percent by GUT LLC, a subsidiary of Unocal, began in May and was completed in August. The 33-mile, 12-inch pipeline connects the Ninilchik gas field to existing natural pipeline infrastructure serving Southcentral Alaska. The Ninilchik area has had several gas discoveries dating from the 1960s, but has never had pipeline infrastructure to bring the gas to market.

• On Sept. 10 operator Marathon and partner Unocal said gas production had begun from the companies’ Ninilchik unit on the southern Kenai Peninsula, with 15 million cubic feet a day of gas moving through the KKPL.

According to Pierce, the Ninilchik unit contains Unocal’s biggest chance for new gas production in the near future.

Unocal is in a 60-40 relationship in the Ninilchik unit, with Marathon holding the lion’s share.

Going after coalbed methane?

On Oct. 27, Sinz said Unocal has no plans for the leases at this time. The three-year leases were issued May 27. Annual rentals, not work commitments, are required by the state on shallow gas leases.

Prior to 2003, Unocal was starting to expand its investment on Alaska’s North Slope, picking up a number of leases in the central North Slope and Brooks Range Foothills.

But the company is no longer looking at the slope as a near-term investment, concentrating instead on the Cook Inlet basin.

Unocal has almost a 5 percent working interest in the Kuparuk River unit and a 10.5 percent interest in the Endicott field.

The Kuparuk investment includes Unocal’s share of the Meltwater development on the southwest corner of Kuparuk and the Palm discovery just west of Kuparuk, both of which are adding reserves for Unocal, Pierce said.