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Cook Inlet investment surges in 2012 After years of declining investment, several independents small and large are taking a shine to the scrappy but prolific basin Eric Lidji For Petroleum News
Cook Inlet undoubtedly went through a renaissance in 2012.
While dwindling supplies remain a concern, the year saw companies large and small making significant investments in the basin after years without exploration and only limited development. If the most ambitious companies were successful, the region would see increased oil and natural gas volumes some 55 years after production began.
The 2012 highlights include: newcomer Hilcorp poised to become the dominant player in Cook Inlet after acquiring the assets of Union Oil Company of California and Marathon; two jack-up rigs after years without any in the region; Apache continuing to permit a major seismic campaign across the entire basin; and independents such as Armstrong, Buccaneer, Cook Inlet Energy, Furie and NordAq drilling wells and shooting seismic.
The details, presented in alphabetical order by company, are as follows:
Apache drills Although it arrived in the state in mid-2010, Apache Corp. made itself at home in Alaska in 2012, both literally and figuratively. Literally, the large Houston-based independent opened a new Alaska office in Anchorage in March 2012, at 510 L Street, Suite 310.
Figuratively, Apache undertook its most significant exploration work in the state to date: acquiring additional acreage, continuing its seismic program and spudding its first well.
In May, Apache picked up seven state leases at the annual areawide lease sale, filling in gaps in its existing leasehold. The acquisition included one large offshore tract in a block of leases from Anchor Point to Kenai, and six tracts near its leases northeast of Nikiski.
In August, Apache and the Alaska Native corporation Cook Inlet Region Inc. announced an agreement allowing Apache to explore for oil and gas on any CIRI land in the Cook Inlet basin not currently under lease — a significant addition to the roughly 589,000 acres Apache already leases from the state, as well as its previous leases across Native lands.
The wide access could serve Apache well should it discover any intriguing oil and gas prospects with the wide reaching 3-D seismic program it is shooting across the basin.
Apache is using state-of-the-art, nodal seismic technology for the program, which includes onshore, nearshore and offshore targets on both sides of Cook Inlet. Following a test of this equipment in early 2011, Apache proposed a three-year seismic survey, but complications in the federal permitting process delayed those plans in mid-2012.
In a March opinion, the National Marine Fisheries Service concluded that the program “is not likely to jeopardize the continued existence of the Cook Inlet beluga whale or Steller sea lion populations, nor to destroy or adversely modify Cook Inlet beluga whale critical habitat.” In September, after finishing surveys on the west side and some of the northern end of the Inlet, Apache paused the program while it waited for additional permits from the NMFS, the U.S. Army Corps of Engineers and the U.S. Fish and Wildlife Service.
Those delays haven’t kept Apache from drilling, though.
After initially outlining plans to drill one well on each side of the basin in 2012, Apache focused its efforts on a plot on the west side where it had completed its seismic work.
In mid-November, Apache started drilling the Kaldachabuna No. 2 exploration well on Cook Inlet Region Inc. subsurface land near Tyonek using the Patterson Rig 191.
The well is following up on a discovery Simasko Production Co. made with the Kaldachabuna No. 1 well in mid to late 1980. While the well initially caused waves in the investing world, subsequent tests found no “commercial accumulation of hydrocarbons.”
Generally speaking, Apache believes there is as much oil still to be discovered in the Cook Inlet basin as has already been produced in the 55-year history of the basin.
Armstrong expands North Fork After years as a pioneering exploration company, Armstrong settled in as a Cook Inlet producer in 2012 by expanding its significant development: the onshore North Fork unit.
The expansion took three forms: enlarging the southern Kenai Peninsula unit, drilling additional natural gas development wells and helping to open new markets in the region.
In July, the Alaska Department of Natural Resources agreed to expand the unit, adding some 2,903 acres in a ring around the western edge of the formerly 640-acre unit. The state also expanded the North Fork gas pool participating area to 800 acres total.
From mid-September through the end of the year, Armstrong and its partners at the field used the Nabors 99 rig to drill two new wells designed to increase gas production at North Fork, the NFU No. 23-25 well and the NFU No. 22-35. The two-well program goes beyond Armstrong’s current work commitments. Armstrong also permitted two other wells — NFU No. 33-35 and NFU No. 42-35 — that it could drill in the future.
Under the 47th plan of development for North Fork — in place until March 2013 — Armstrong must test additional zones in the NFU No. 34-26 well and drill at least one additional well at the field to target a previously untested segment of the Tyonek.
Those efforts are helped by a recent 3-D seismic acquisition that “greatly improved the regional structural definition of the four-way anticlinal North Fork closure,” according to state filings. The trick at North Fork is to find productive patches within the sandstones, Vice President of Land and Business Development Ed Kerr told Petroleum News in September. “Depositionally, these are lenticular sands, so they come and go,” Kerr said, referring to layers of sands and mud. “We’re drilling through a package of sands.”
Through its pipeline subsidiary Anchor Point Energy LLC, Armstrong is also working with Enstar Natural Gas Co. to expand natural gas distribution in the southern Kenai.
In early 2012, the state approved a grant to help build a transmission line to the cities of Homer and Kachemak City. And in August, the state gave Anchor Point Energy and Enstar approval to build a short, state-funded pipeline into the community of Nikolaevsk.
Aurora stumbles at Cohoe In addition to its regular development and production activities, Aurora Gas LLC saw its attempts to form a unit on the Kenai Peninsula come to an apparent end in 2012.
In July 2010, Aurora applied to form the Cohoe unit over the two state leases and an adjoining lease owned by Cook Inlet Region Inc. A two-year plan of exploration proposed re-entering the Cohoe Unit No. 1 well from 1973 and gathering new 3-D seismic data. After a more than a year of discussions, the Alaska Department of Natural Resources rejected the unit in September 2011, saying the work could be undertaken without unitization. Aurora appealed, but the state upheld the ruling in May 2012.
In an unusual move, the independent investor Dan Donkel appealed the ruling, saying his overriding royalty interest in the Cohoe leases entitled him to challenge the ruling.
Buccaneer starts production … Buccaneer Energy Ltd. became a producer in 2012, but the company delayed much of its ambitious exploration plans for Cook Inlet as it worked to bring a jack-up rig to Alaska.
After drilling two wells in 2011, Buccaneer brought the onshore Kenai Loop field into production in January 2012. By the end of the year, Buccaneer said it had increased production from the field to 6.5 million cubic feet per day, up from 5 million cubic feet per day.
In April, Buccaneer began selling 5 million cubic feet per day into the Cook Inlet Natural Gas Storage Alaska facility. As production increased in October and December, Buccaneer announced two small-volume, short-term sales agreements with unnamed third parties.
Looking to expand its onshore work, a Buccaneer subsidiary signed a three-year lease in June on the Marathon Glacier 1 purpose-built truck-mounted drilling rig. In September, it used the rig to drill the Kenai Loop No. 4 well. A “small leak in the well liner” delayed testing toward the end of the year, but Buccaneer said the leak has been plugged and the well “identified multiple sands with indications of gas within the Tyonek formation.”
And after processing a 3-D seismic acquisition over the region, Buccaneer said it now believes the producing formation at Kenai Loop is much larger than it originally thought.
In December, Buccaneer applied to form the 7,500-acre Kenai Loop unit, including four State of Alaska leases, two Alaska Mental Health Trust leases and one Cook Inlet Region Inc. lease. In proposed plan of development for the unit, Buccaneer said it would include between one and three wells per year at Kenai Loop for the first five years of the unit.
In October, Buccaneer also applied to form the 46,395-acre West Eagle unit over a block of onshore leases in the southern Kenai Peninsula set to expire. In its unit application, the company said it was “poised to drill” at West Eagle, but needed assurances it would be able to keep its acreage. Buccaneer also proposed a 61 square mile 3-D seismic survey.
… but exploration is delayed Originally, Buccaneer planned to use its Endeavour jack-up rig to drill wells at its offshore Southern Cross and Northwest Cook Inlet units by September 2012, but as the summer months passed without the rig embarking from a shipyard east Asia to the Cook Inlet, the company was forced to defer its plans by one year. The state put the two units in default in October, giving Buccaneer until October 2013 to drill its initial wells at both.
With the extra time, Buccaneer planned to drill at Cosmopolitan, a field off the coast of the southern Kenai Peninsula. Alongside the Fort Worth-based BlueCrest Energy II, LP, Buccaneer purchased the two-lease prospect in February and closed the deal in August.
Although the Endeavour rig arrived in Cook Inlet in September, at the end of the year it was docked in Homer as crews completed maintenance and upgrades started overseas.
The nature and history of those upgrades is the subject of a lawsuit between Buccaneer and Archer Drilling LLC, its original operator on the rig. After the companies parted ways in mid-December — with each claiming to have terminated the agreement with the other — Buccaneer hired Spartan Drilling LLC to take over as the operator of the rig.
Having recently received a land use permit from the state, Buccaneer hopes to soon move the rig to Cosmopolitan and get the final permits to begin its proposed two-well program.
Conoco keeps on keeping on After four years of major investments to its legacy assets in Cook Inlet, ConocoPhillips saw its activities in the basin decline considerably in 2012, but not peter out completely.
ConocoPhillips drilled at least two new Cook Inlet wells in 2012 — Beluga River Unit 242-04 between April and July and Beluga River Unit 244-23 between June and September — according to Alaska Oil and Gas Conservation Commission information.
And after announcing plans in 2011 to shut down its pioneering Kenai Peninsula liquefied natural gas export terminal, ConocoPhillips unexpectedly kept the facility open the entire year as demand from Asia justified additional shipments. Although the current export license expires on March 31, 2013, ConocoPhillips said it believes the plant “has options for the future” depending on the course of regional natural gas production.
Another longtime producer, XTO Energy, initiated no major development activities in 2012, but highlighted a major concern about the state of the basin when it suspended oil production at its two Middle Ground Shoal platforms because of a shortage of fuel gas.
Cook Inlet Energy gearing up As it focused on recompleting wells from the Osprey platform, Cook Inlet Energy LLC also found time in 2012 to drill an exploration well and plan for future exploration work.
After relinquishing five leases in February around its proposed Stingray exploration program on the west side of Cook Inlet, the company used its rig 34 to drill the Otter No. 1 exploration well to some 5,600 feet in the area 10 miles north of the Beluga gas field.
“The mud loggers reported two significant hydrocarbon gas shows in the zone of interest,” CEO David Hall said in July. “We’re very excited about the Otter No. 1.”
The Otter No. 1 well tested the Beluga formation, but mud pump problems kept the company from drilling to its intended depth of 7,000 feet. Cook Inlet Energy is now planning to drill a second Otter well to 7,500 feet to test the Tyonek formation, and an exploration well at Olsen Creek, a shallow gas prospect southwest of the Otter prospect.
In December, Cook Inlet Energy asked the Alaska Mental Health Land Trust to expand a soon-to-expire lease on “highly prospective” land 10 miles north of Tyonek, in the vicinity of Otter and Olsen Creek, in return for drilling two wells by the end of 2013.
Cook Inlet Energy also expanded its holdings in 2012.
In April, the company picked up the 45,764-acre Susitna Basin V exploration license, its third, smallest and — at five years — shortest exploration license in the area north of Anchorage. The company is now licensing some 580,147 state acres for exploration.
At a lease sale in May, Cook Inlet Energy bid $2.7 million on 74,880 acres, including leases north of Clam Gulch, north of its West McArthur River unit and north of the Trading Bay unit. The company “got everything we went after,” Hall said after the sale.
In September, Cook Inlet Energy acquired the outstanding minority interest in its two leases covering the Sword and Sabre prospects on the west side of Cook Inlet.
And during the year, Cook Inlet Energy also proposed the $50 million Trans-Foreland Pipeline, a 29-mile subsea pipeline across Cook Inlet to improve oil shipments.
Furie returns to KL unit After announcing a headline inducing natural gas discovery at the offshore Kitchen Lights unit in late 2011, Furie Operating Alaska LLC took a quieter approach in 2012.
The Houston-based company completed two wells and one sidetrack, and began permitting a development plan for the massive unit in the waters of the upper Cook Inlet, while also fighting a federal fine over its tactics for bringing a jack-up rig to Alaska.
After suspending operations on the Kitchen Lights Unit No. 1 well in October 2011 at 8,805 feet, halfway to target depth, Furie re-entered the well in May 2012, again using the Spartan 151 jack-up rig to finish the job. The company reached a total depth of 15,298 feet in August, above the pre-Tertiary zone, and moved the rig to drill to another location.
Furie began drilling the Kitchen Lights Unit No. 2, but as of late October the well had not reached a depth below 9,000 feet, according to information obtained by Petroleum News.
By late October, though, Furie had completed a sidetrack to Kitchen Lights Unit No. 2.
As it continues exploring the prospect, Furie is permitting the KLU Platform A to underpin long-term gas production in the region. According to filings with the U.S. Army Corps of Engineers, Furie described a platform with a 64.5-foot by 72-foot deck, an 18-foot diameter caisson, two subsea gathering lines and a new production facility.
In early 2012, the Alaska Department of Natural Resources gave Furie a four-year extension of the Kitchen Lights unit terms, through January 2016. The plan attached to the extension called for finished KLU No. 1 and drilling at least four new wells.
But early in the year, the U.S. Customs and Border Protection upheld a $15 million fine against the company formerly known as Escopeta Oil Co. for moving the Spartan 151 jack-up from Texas to Cook Inlet using a foreign-flagged vessel, without having a valid waiver of the federal Jones Act. Furie sued the U.S. Department of Homeland Security over the fine, which it claims is unwarranted and said is scaring away potential investors.
Hilcorp arrives In 2012, Hilcorp became a major player in the Cook Inlet.
In January, Hilcorp closed on its 2011 acquisition of the Cook Inlet assets of Union Oil Company of California, becoming the operator of the Deep Creek, Ivan River, Lewis River, Nikolaevsk, Pretty Creek, South Granite Point, South Middle Ground Shoal, Stump Lake and Trading Bay units, and picking up interests in numerous other oil and natural gas fields, offshore platforms, pipelines and storage facilities across the basin.
In April, Hilcorp acquired the Cook Inlet assets of Marathon Oil Corp., which, once the deal closes, would make it operator of the Beaver Creek, Cannery Loop, Kasilof, Kenai, Ninilchik, North Trading Bay and Sterling units, plus pipelines and a storage facility.
Hilcorp said it spent around $230 million in Alaska in 2012, with about half going to new developments and around 38 percent going toward refurbishing old assets in its portfolio.
Those efforts included working on existing wells at legacy fields, but several larger developments as well. For much of the year, Hilcorp worked to re-activate the Drift River oil terminal closed by the 2009 eruption of the Redoubt volcano and thereby resume normal operations for the shipping of oil from the west side to the east side of the inlet.
In December, Hilcorp began producing some 5 million cubic feet per day from the Red Pad in the Nikolaevsk unit and helped fund a southern Kenai pipeline to market the gas.
During the year, Hilcorp also drilled three wells at the Deep Creek unit to maintain natural gas production, and applied for a permit to shoot 3-D seismic in the region.
In May, Hilcorp filled-in its newly acquired assets across the basin by bidding $3.1 million on 82,560 acres — 18 tracts — in the annual Cook Inlet areawide lease sale.
Linc gets unconventional Linc Energy Inc. saw its conventional gas ambitions in Cook Inlet stall in 2012, but it pushed ahead on plans the produce gas from underground coal deposits within five years.
The Australian independent started the year with some 123,000 acres spread across the basin, but the majority of its state acreage expired in June, leaving the company with just one state lease, as well as its Alaska Mental Health Trust leases and exploration licenses.
In June, Linc applied to form the Angel unit over its remaining state lease and a contiguous Alaska Mental Health Trust lease covering some 1,700 acres in the Point Mackenzie region where Linc drilled the LEA No. 1 exploration well in late 2010.
Saying its well data had found a geologic feature worthy of further investigation, Linc proposed a two-year program of drilling and seismic acquisition, but the state ultimately denied the unit application. “At this time, Linc Energy has not presented a structural trap that is reasonably defined and delineated, and therefore has not identified a potential hydrocarbon accumulation for the proposed Angel unit,” the state wrote in its decision.
Linc said it planned to either appeal the decision, or resubmit its application.
Meanwhile, the company began exploring potential underground coal gasification prospects on the lands its holds under an Alaska Mental Health Trust exploration license.
In early 2012, Linc finished drilling the TYEX01 and TYEX01X core holes on the west side of Cook Inlet, near the Beluga Power Plant, and called the results “very encouraging.” In mid-2012, Linc received the Linc Energy Core Rig No. 1, a rotary-core rig custom built by Buffalo Custom Manufacturing, but bad weather postponed its plans to use the rig to drill the KEEX02 core hole 18 miles southwest of the Beluga airstrip.
In May, the Alaska Oil and Gas Conservation Commission gave Linc a permit to drill the LDRT No. 1 core hole in the vicinity of its LEA No. 1 well. In late November, the AOGCC gave Linc a permit to drill the TYEX02 core hole near TYEX01 and TYEX01X.
NordAq preps two prospects NordAq Energy Inc. made progress on two Cook Inlet prospects in 2012. Although only some 20 miles apart, the two prospects are on opposite sides of the basin.
On the east side, NordAq moved ahead on plans to develop its Shadura prospect. The company claims to have made a large discovery in early 2011 with the Shadura No. 1 well, drilled on Cook Inlet Region Inc. land in the Kenai National Wildlife Refuge.
The plan calls for drilling up to six production wells at a site about 13 miles northeast of Nikiski, in the northwest portion of the refuge west of Hilcorp’s Swanson River unit.
In a recent draft environmental impact statement, NordAq proposed a two-stage construction process. First, it would build limited infrastructure to support an initial test well. Then, if the well results were favorable, it would expand the infrastructure to support five more development wells, an industrial water well and a waste disposal well.
In support of the development, NordAq is permitting a 49-square-mile 3-D seismic survey over the Shadura, scheduled to take place over the first four months of the year.
NordAq anticipates bringing the field into production as soon as 2014.
The U.S. Fish and Wildlife Service is currently taking comments on the draft EIS.
On the west side, NordAq began exploring its Tiger Eye prospect.
In October, the state approved formation of the 7,680-acre Tiger Eye unit covering two onshore leases near the mouth of the Kustatan River, within the Redoubt Bay Critical Habitat Area.
The Tiger Eye unit agreement called for NordAq to drill a well by the end of 2012, another by the end of 2013 and to conduct a 3-D seismic survey over the region in 2013.
Shortly after getting the unit, NordAq used Nabors Alaska Drilling Rig 106AC to drill the Tiger Eye Central No. 1 well, targeting the Tyonek and Hemlock formations.
The company plans to drill the Tiger Eye North well next year.
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