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Vol. 22, No. 47 Week of November 19, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

The Producers 2017: AIX working within means at Kenai Loop

A new supply contract allows for future production declines and for a possible increase

Eric Lidji

For Petroleum News

The history of the Kenai Loop gas field shows how two companies with different philosophies can employ different strategies when it comes to operating a given property.

Since assuming control of Kenai Loop in late 2014, AIX Energy LLC has taken a much more cautious approach than its predecessor - the Australian independent Buccaneer Energy Ltd. - took toward developing the onshore field in the northern Kenai Peninsula.

Over the course of its nearly five-year tenure as operator of Kenai Loop, Buccaneer drilled four wells, bringing the field online in January 2012. The company also secured a series of gas supply agreements and increased production to meet those agreements. But its ambitiousness in the Cook Inlet region yielded a long regulatory battle over correlative rights at Kenai Loop and eventually led the company to file for bankruptcy protection.

By contrast, the Texas-based independent AIX Energy has not drilled any new wells since it acquired Kenai Loop from Buccaneer in an October 2014 bankruptcy auction.

Instead, the company has been focusing on improving existing infrastructure at the field and managing marketing activities. In its most recent plan of development, submitted in May 2017, the company described its strategy as an attempt “to maximize field recovery and net present value by aligning production capacity with commercial opportunities.”

Production declining

After several years of steady production, the Kenai Loop field appears to have reached an initial peak. Natural gas production has been declining in recent years. The field produced 3.6 billion cubic feet in 2015, 3.2 billion cubic feet in 2016 and 1.5 billion cubic feet during the first half of this year, for a cumulative total of 16.5 billion cubic feet by the end of June 2017, according to the Alaska Oil and Gas Conservation Commission.

Only two of the four existing Kenai Loop wells are currently in production. The KL 1-1 and KL 1-3 wells together produced 3.159 billion cubic feet of gas in the year ending March 31 - down from 3.657 billion cubic feet during the previous year, according to figures AIX Energy provided in its development plan. The wells also produced 507 barrels of condensate during the reporting year, down from 649 barrels the previous year.

In a previous plan of development, AIX Energy said it was evaluating a plan to re-perforate the existing Kenai Loop No. 1-3 well in order to improve deliverability. The company did not include the project in its most recent plan of development for the field.

At the time AIX Energy submitted its current plan, in early May 2017, the company had at least four gas supply agreements at the Kenai Loop field: a non-firm contract with Tesoro, a non-firm contract with an un-named company (likely Chugach Electric Association Inc., given previous regulatory filings), a firm contract with Tesoro set to expire in early 2018 and a larger firm contract with Enstar Natural Gas Co. set to expire in mid-2018. “AIX has multiple contracts which are likely to lead to additional non-firm sales in 2017. AIX is also pursuing additional firm commitments beyond the termination of the Tesoro and Enstar contracts in 2018,” AIX Energy wrote in its development plan.

This past summer, Enstar requested regulatory approval for a new three-year gas supply agreement with AIX Energy starting around June 2018, at the end of the current contract.

The delivery commitments contained in the supply agreement reflect declining gas production at Kenai Loop but also allow for the possibility of increases in the future.

The agreement requires a firm supply of 1.370 billion cubic feet of gas (about 5 million cubic feet per day) between July 1, 2018, and March 31, 2019; 1.464 billion cubic feet between April 1, 2019, and March 31, 2020 (about 4 million cubic feet per day); and between 1.095 billion cubic feet and 1.825 billion cubic feet (or about 3 million to 5 million feet per day) between April 1, 2020, and March 31, 2021. The contract gives AIX Energy until Sept. 1, 2019, to commit to specific supply deliveries for the third year.

The agreement sets a price of $6.35 per thousand cubic feet in the first year, $6.44 per thousand cubic feet in the second year and $6.54 per thousand cubic feet in the third year.

KL 1-2 and KL 1-4

The future of the offline wells is uncertain.

AIX Energy is considering plans to convert the temporarily suspended KL 1-2 production well into a disposal well. The shut-in KL 1-4 production well is not currently connected to the system, but AIX Energy has expressed an interest in attempting to bring the well online “to provide increased deliverability, to provide redundancy to meet firm gas sales obligations and to possibly increase ultimate recovery,” according to the company.

Buccaneer Energy drilled KL 1-4 in October 2013. The well tested at 2.5 million cubic feet per day but later proved to be producing from the same reservoir as KL 1-1.

Earlier this year, AIX hired a geophysical/petrophysical team “to evaluate additional rate enhancing opportunities” at the four Kenai Loop wells but is still reviewing the results.

Other infrastructure projects

In addition to the four wells, AIX Energy is evaluating other infrastructure projects.

A major unresolved project is a plan to install a gas compression system at the unit. In its plan of development from May 2016, AIX Energy said it expected to install such a system within 12 to 18 months. But after updating internal models based on “flowing and shut-in data,” the company recently told officials the system could wait until mid-2018.

The questions to be resolved are the same as last year: whether to purchase a system or to lease it, and whether the system should be gas-fired or electric-fired. The details of the compression system will also guide decisions about trying to revive the KL 1-4 well.

Another focus for AIX Energy has been reducing water-handling costs at the Kenai Loop field. Water handling was the second highest lease operating expense after personnel for the company. An onsite evaporator installed in 2015 provided only “modest benefits,” and the company was able to negotiate a 29 percent drop in water handling costs in 2016.

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