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Vol. 25, No.52 Week of December 27, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

HEX CI still moving forward

Focused on improving Kitchen Lights sustainability, but also looking at opportunities

Kay Cashman

Petroleum News

Since taking over operatorship of the Cook Inlet Kitchen Lights unit on July 1 with its purchase of bankruptcy debtor Furie Operating Alaska LLC and related firms, HEX Cook Inlet LLC touts a surprisingly hefty list of accomplishments.

The company, a joint venture between HEX LLC (80%) and Rogue Wave AK LLC (20%), was founded in 2020 by Alaskan John Hendrix, its president and CEO. Hendrix, who was raised in Homer and is an engineer, has close to four decades of experience in the energy industry in Alaska, the Lower 48 and internationally with Apache, BP and Schlumberger.

In a Dec. 18 presentation to a Commonwealth North study group, Hendrix listed HEX CI’s accomplishments, the most recent being record natural gas production in 2020 of 15.4 million cubic feet per day, as compared to about 12 million when HEX took over on July 1. The others included:

• Timely and early payments on AIDEA loan.

• Majority of field operations contracting turned over to Alaska-based Udelhoven Oilfield Services, which was founded in Kenai in 1970 by Jim Udelhoven who Hendrix said July 7 is “one of those men whose word you can trust with a handshake.”

• Hired Alaskan Kevin Smith (first employee ever for Furie in the field), who had retired from BP after a 25 year-plus career on the North Slope to take the position.

• Brought in production safety management coach Daryl Leech on Aug. 21.

• Anchorage office functioning vs. a Houston office.

• Anchorage local employees up 500%, field employees up 1000%.

• Established data management control.

• Performing well surveys on A1 and A2A (two of the field’s four production wells).

• Entered A4 well, fishing attempted, punched tubing, production achieved.

“When we took over, we basically had to go in and fix everything,” Hendrix said. “There was not one Alaska person working in our field (including contractor personnel). There was only one person in the Anchorage office. … Well files were in boxes. … We’re going to have to go back and work all of the wells over to have access to all the original reserves because in a lot of it you have tubing inside the well covering up the flow,” he said.

Praised AIDEA

When HEX took over operations on July 1, there were three wells in the unit that weren’t producing as much as they could be and a fourth well, A-4, the newest well, which was offline because the company was not allowed to produce from the Sterling formation. There were two wireline fish and a tubing plug in the well which prevented HEX from accessing it and adding perforations to the Beluga formation.

“It was a journey, it was a challenge to get where we are today,” Hendrix said, more than once thanking AIDEA - the Alaska Industrial Development and Export Authority - for providing financing.

“It was the only financial institution at the time in the state that would help us - even across the United States and North America it was very tough to get financial backing for a project in Alaska.”

This, in part, is due to Alaska’s lack of credibility in financial markets because the state has not met its oil and gas tax credit obligations.

“We continue to say we are open for business, but we must demonstrate it,” Hendrix said, starting with “paying our tax credit obligations.” However, he did praise Gov. Mike Dunleavy for proposing the FY22 budget fund oil and gas tax credits at the statutory minimum of $60 million - and the governor’s decision to introduce legislation requiring state departments and agencies to end existing relationships and partnerships with financial institutions that have chosen to stop financing oil and gas exploration and development in the Arctic.

Furie’s creditors are owed approximately $103 million dollars against unpaid state tax credits and although once the credits are paid HEX won’t get much from them, he wants to see those creditors paid.

Also on Hendrix’s list of must-dos for the State of Alaska is improving “permit timing.”

Finally, he wants to see more education of Alaskans on the benefits of responsible resource development.

Room for growth

In addition to the offshore Kitchen Lights unit, which is the largest unit in Cook Inlet with more than 83,000 acres, Furie’s main assets include an offshore natural gas production platform. The Julius R. is the newest platform in Cook Inlet. Structured to have six wells online, there are four wells in its slots now, he said.

“And there is a subsea pipeline that goes to our onshore facility at Nikiski from the Julius R. platform. … It’s 16 miles long and 16 inches in diameter,” Hendrix said.

In the seventh plan of development for Kitchen Lights, submitted to the Alaska Department of Natural Resources’ Division of Oil and Gas in September, HEX said Kitchen Lights gas production was restored in April 2019 by the former owners of Furie after water in the subsea pipeline created hydrate plugs.

Production is now limited to the Beluga formation to restrict the amount of produced water entering the pipeline.

In his December presentation, Hendrix explained that with the Beluga reservoir in decline the upside prize for the new owners is returning the Sterling reservoir to production, which will require a water handline permit for overboard discharge of water.

Hendrix mentioned the company is waiting on that permit from the Alaska Department of Environmental Conservation and expects it at any time.

HEX’s plan of development for Kitchen Lights said all four of the wells on the Julius R. platform have been perforated in both the Sterling and the Beluga.

“Obtaining the platform water handling permit more than doubles our remaining reserves and revenue,” HEX said.

The onshore gas processing facility can reportedly handle five times what it is doing today.

HEX’s way forward

“The way forward is to continue to be a sustainable Cook Inlet producer. We’ve got to continue to increase our production. We’ve got to think about jobs for Alaska and about economic development in Alaska,” Hendrix said, noting the ADEC permit was needed to accomplish these things.

The company also has a bonding challenge with the Alaska Oil and Gas Conservation Commission, which Hendrix is working to resolve. “We have multiple overlapping bonds” with the various agencies, including AOGCC. “All we’re asking for is, let’s be sensible about this overlap bonding. Let’s get it right.”

“Right now we are out there working on our water handling equipment to get it up and running,” Hendrix said. “We don’t have a permit to operate it, but they did give us a permit to construct. … It’s worth it to us to spend a million or two in hopes we will get the operating permit because if all of a sudden we get it and the equipotent is not running, we could lose six months of production,” Hendrix said

Udelhoven is in the process of pre-installing the equipment. They have been “out there with about 14 people for two weeks, welding, and setting new separators.”

The end result, he said, is improved operation efficiency, “better than we’ve ever seen in this field.”

Another thing HEX has been doing is looking “very diligently” for additional drilling and production opportunities “above the base,” Hendrix said. “Where can we next drill? We only have two slots unless we sidetrack a well. … What else is out there? What gives us the biggest bang for a buck? What is the lateral extent of our field?”

“We’re getting a good handle on that,” he said. “We hope in the near future to have a drilling program.”

But right now the company is in fixing mode.

For example, “there is so much opportunity out there to cut costs,” Hendrix said, such as the $500,000 or so a year the company spends on electricity just for its Nikiski plant, when it could make its own electricity with its gas.

Alaska’s way forward

Going back to the subject of making Alaska competitive near the end of his presentation, Hendrix said the state must have a stable fiscal regime.

If there is another ballot initiative, he would like to see one that makes Alaska’s fiscal regime stable for at least the next four years “and then they can change it. But every year? Who’s going to put money in a state that moves every year?”

“We’re turning into a Third World state with First World regulations,” he said, referring to his dissatisfaction over the most recent attempt to raise taxes that was introduced in Ballot Measure 1 with “no public process.” (The measure was voted down by Alaskans on Nov. 3.)

And we must move Alaska from a raw product producer to a value-added producer, he said.

If we want to keep our children in Alaska with paying jobs, and “stop the brain drain, “we need to basically expand from being a raw producer … to a producer of product with by-products.” That will mean more jobs, Hendrix said.

It will also mean more revenue to the state.

Our oil and gas, he said, is worth more as a by-product than as a raw product.

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