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Allies in worst of times
AIDEA, HEX rescue bankrupt Cook Inlet unit, switch to local hire, boost gas output
Kay Cashman Petroleum News
In the Aug. 2 public portion of the Alaska Industrial Development & Export Authority's meeting in Anchorage, HEX Cook Inlet LLC made a presentation to AIDEA's board of directors, highlighting the company's accomplishments since HEX CI acquired the Cook Inlet Kitchen Lights unit on June 30, 2020. The presentation to AIDEA also included present activities and future plans.
HEX CI's acquisition of Furie Operating Alaska and Cornucopia Oil & Gas Co. and Corsair Oil & Gas along with the Kitchen Lights unit was through Delaware bankruptcy proceedings. Hendrix was restricted by the court from talking with the state of Alaska on a number of foundational issues.
The total purchase price was $34 million, of which $19 million were fixed assets subject to property tax. The state valued the fixed assets at $81 million -- more than four times what Hendrix paid for them, requiring him to write a check for $1.6 million every year (which he does under protest), instead of the $400,000 he would be paying if the value was set at $19 million. If Hendrix doesn't pay the $1.6 million, it opens him up to fines that could double the amount due over time. The IRS only allows him depreciation on $19 million.
HEX CI's acquisition was facilitated with a $7.5 million term loan from AIDEA. "All payments were made on time, some early," an AIDEA employee said prior to HEX CI's presentation.
HEX LLC, which owns 100% of HEX CI, is owned by long-time Alaskan John Hendrix, who formed the HEX companies for the purpose of purchasing Furie, its sister companies and their Cook Inlet assets -- principally to switch the upper Cook Inlet Kitchen Lights unit from foreign and Outside ownership to Alaska ownership, Hendrix told Petroleum News.
On June 30, 2020, HEX CI became the only producing Alaskan-owned oil and gas company in the state.
In addition to the 83,000-acre Kitchen Lights unit, the company's assets include the Julius R. production platform, a 15-mile subsea gathering line and an onshore natural gas processing facility at Nikiski on the Kenai Peninsula. While the platform is the newest and smallest in Cook Inlet, the unit is the largest by acreage and is considered to have undeveloped potential for natural gas.
HEX CI's Aug. 2 presentation was made by Mark Slaughter, director of marketing for Furie. Hendrix was unable to deliver the presentation because he was in an Alaska Superior Court trial that he initiated to fight what he argues are "unfair and excessive" property taxes levied by the Alaska Department of Revenue (some of which went to the Kenai Peninsula Borough).
Originally from Fairbanks, Slaughter has worked for Furie since November 2015. He was Furie's only Alaskan employee prior to the June 30, 2020, acquisition by HEX CI.
HEX CI's Furie is the operating company that runs the offshore platform, gathering line and onshore gas processing facility.
Challenging times Although it was the early days of the COVID-19 pandemic and a challenging time to take over a natural gas producing field that was underperforming and needed major repairs, Hendrix and AIDEA's shared vision for Kitchen Lights yielded results.
In the first two months alone Outside employees and contractors (mainly from Louisiana and Texas) dropped by half, being replaced by Alaskans and Alaska contractors. As of June 30, 2023, per Slaughter, there are only three Outside employees (including a geologist, a geophysicist and an operator that have been with Furie for several years) -- the rest are Alaskans (see employment chart in the pdf and print versions of this story).
Another shared goal of Hendrix and AIDEA was stabilizing and then increasing natural gas production -- hopefully from both the Beluga and Sterling formations, with much of the potential upside in the unproved Sterling.
Furie under its previous owners brought the unit into production from a single well in November 2015 and subsequently drilled three more production wells, with the last being the KLU A-4 well in October 2018.
By the time HEX CI took control, one of the four wells was offline, awaiting upgrades and repairs. And the three other producing wells were underperforming.
There are six slots for wells on the Julius-R platform.
In August 2020, Furie reentered and successfully restarted production from KLU A-4 well.
In a Dec. 18, 2020, presentation in Anchorage to Commonwealth North, Hendrix said, "When we took over Kitchen Lights, we basically had to go in and fix everything." This statement was confirmed by Alaska's Division of Oil and Gas.
In the next three years the company supplied natural gas, mainly in colder months. to several industrial users, including Enstar, Marathon Petroleum, Matanuska Electric Association, Homer Electric Association, and Chugach Electric Association.
Summer work, jack-up Furie kept all four wells online from August 2020 through February 2023, when the "KLU A-1 well sanded up," Slaughter said, meaning it started to produce sand. The well had to be shut in, requiring repairs.
Furie is reworking two of the four KLU wells, including KLU A-1, this summer with a hydraulic workover rig at a cost, Slaughter said, of some $8 million, noting their Alaska contractor had to bring the workover rig in from Canada because there were none available in Alaska that would work on the platform.
"The platform floor is very small. Currently we have 25 people working out there and we have beds for 26," he said.
"The workovers are really designed to get us through the winter, get us poised for next summer," Slaughter said.
"This past year we have been reprocessing seismic, identifying drilling targets," he said, in hopes of "securing time on a jack-up rig for next summer - to drill a sidetrack or possibly a grassroots well."
"You're talking $30-$40 million for a new grassroots well," Slaughter said.
"We'll have to secure financing for that, so we anticipate being back in front of the AIDEA board for what we want to do with the Kitchen Lights unit," he said.
But first, he said, the property tax issue has to be resolved. Hendrix has said the $1.2 million a year he is spending on excess property tax would be better spent on well work to produce more natural gas for Southcentral Alaska's residents who rely on gas to heat and electrify their homes and businesses.
Active bidder In pursuit of his goal to increase natural gas production, Hendrix's companies have been active bidders in state of Alaska Cook Inlet basin lease sales since 2020.
HEX CI was one of two companies in the 2021 bid round. In the May 2022 sale, Furie Operating was the only bidder, winning two leases.
"Our predecessor had already relinquished those. I decided we needed to pick them up because they are close enough to where we want to produce in the future. It's all about shoring up acreage surrounding our platform," Hendrix said.
Produced water handling system One of the reasons for Furie's bankruptcy was a lengthy closure of the field in the winter of 2019 because of hydrate blockages in Kitchen Lights subsea pipeline and in the onshore facility -- hydrate formation that resulted from the freezing of a combination of gas and excess water in the line, costing the company $17 million in lost production and penalties to their utility customers.
To remediate this issue, Hendrix had a produced water handling system installed primarily for the Sterling formation, and he obtained the appropriate permits to allow production of gas zones with higher water content.
"We spent about $1.8 million on it," Hendrix said. "Udelhoven installed it."
Alaska-based Udelhoven Oilfield Services was founded in Kenai in 1970 by Jim Udelhoven. Hendrix said he was "one of those men whose word you can trust with a handshake."
History of unit formation Following a series of battles over work commitments involving several small players in Cook Inlet, the state formed the 83,394-acre Kitchen Lights unit in 2009 to prevent a legal battle and encourage exploration and development activities at a time of dwindling local gas supplies.
The unit combined the Escopeta Oil & Gas Co.-operated Kitchen unit, the Renaissance Alaska LLC-operated Northern Lights prospect and the Pacific Energy Resources Ltd.-operated Corsair prospect.
So, the state took three previously distinct prospects that were unitized and then administratively divided them into four exploration blocks: Corsair, North, Central and Southwest.
All development activities to date have occurred within the Corsair block.
About John Hendrix Hendrix was raised in Homer, Alaska, and is an engineer. He has more than four decades of experience in the energy industry in Alaska, the Lower 48 and internationally with Apache, BP and Schlumberger.
That experience includes managing Apache's Cook Inlet operations from 2012 until 2016, when the company let its leases drop because of some of the same challenges HEX CI and Furie face today.
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