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Vol. 27, No.32 Week of August 07, 2022
Providing coverage of Alaska and northern Canada's oil and gas industry

HEX CI and Furie update

John Hendrix talks about Sterling tests and evaluations, ongoing tax battle

Kay Cashman

Petroleum News

John Hendrix is the owner of the only Alaskan-owned natural gas producing company in Alaska, Furie Operating Alaska. Hendrix became a Cook Inlet natural gas producer in July 2020 when his newly formed company, HEX Cook Inlet LLC, acquired Furie Operating Alaska LLC and its partners Cornucopia Oil & Gas Company LLC and Corsair Oil & Gas LLC in bankruptcy proceedings.

The centerpiece of the purchase was the offshore Kitchen Lights unit, its Julius R. production platform, a 15-mile subsea gathering line and an onshore natural gas processing facility at Nikiski.

The Kitchen Lights unit, or KLU, is the largest unit in Cook Inlet by acreage and has been seen as a source of growth for the basin.

Hendrix was raised in Homer, Alaska, and is an engineer. He has close to four decades of experience in the energy industry in Alaska, the Lower 48 and internationally with Apache, BP and Schlumberger.

That experience included 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 faces today.

In a recent interview with Petroleum News, Hendrix talked about Furie’s successes along with the challenges the company has faced in the last two years. He is concerned about the focus on renewables such as solar and wind, believing there needs to be an orderly planned transition but doesn’t see anyone taking the lead. Without an orderly transition, Hendrix says Alaskans will be put at risk.

After attending the Alaska Sustainability Conference in May, he pointed out that renewable energy project companies get grants and low interest loans. None of these grants and low interest loans are available to local oil and gas companies.

Rather, Hendrix secured a loan from the Alaska Industrial Development Export and Authority to acquire the Furie assets.

According to Hendrix, the state of Alaska is also at a defining moment. On the one hand the state is collaborating with utilities to reduce the use of hydrocarbons while on the other side offering competitive oil and gas lease sales in Cook Inlet and the North Slope.

While not opposed to renewable energy, Hendrix said, “Why would I want to put myself out of business?”

A few bad apples

Although Hendrix thinks the commissioners of Alaska’s Department of Revenue and Department of Natural Resources are doing a good job to improve the business climate for oil and gas companies working in the state, he said there remain some obstacles to achieving balance between government and local businesses.

Alaska is an expensive place to operate, he said, likening the regulatory regime to a field spiked with land mines: “Yes, you can get across the field but you don’t know what kind of regulatory land mine you’re going to step on along the way that might cause your investment to go up in smoke,” he said, noting most of those ‘mines’ involve required federal permitting on federal and state acreage.

One of the mines HEX has run into was a property tax valuation that was “more than four times what the IRS allowed the KLU assets to be depreciated from,” Hendrix said. “How can the state turn around and value it four times more than the IRS will allow me to depreciate? And it’s been audited. This is the kind of stuff that kills you. I must pay $1.6 million every year in property taxes until this is settled.

“It is going to take about three years to reach final decision on this matter in the courts. This means that I will have more than $5 million tied up in this matter, not including attorney fees.”

The company appealed the decision by the department to the State Assessment Review Board. SARB upheld the department’s decision so now the issue is headed to court.

Hendrix says this is “unfair and excessive,” and money that should be used for well work to produce more natural gas for Southcentral Alaska’s residents that rely on gas to heat and electrify their homes and businesses.

Until the lawsuit is settled, in or out of court, HEX cannot afford to invest in any major capital improvements at Kitchen Lights.

“We’d hoped for a settlement, which would have saved everyone, including the state of Alaska money, but that hasn’t happened,” Hendrix said.

In the meantime, the company is trying to keep gas production level instead of investing major money to make significant improvements designed to increase output.

Production data from the Alaska Oil and Gas Conservation Commission for May shows output from KLU averaged 12,479 thousand cubic feet per day, representing 5.8% of Cook Inlet gas production in that month.

KLU is one of the seven current gas producers in the inlet.

Court in October

How long until the lawsuit is resolved?

“We had hoped the state of Alaska would come to the table and settle this, through mediation that was recommended by the judge, but as of now they remain uncommitted. The Kenai Peninsula Borough is in favor of mediation.

“We remain optimistic that mediation will come about before the case is set to be heard by the judge in October,” Hendrix said July 22. This, he says, could save a lot of time and money for all the parties involved.

“We are an Alaskan company. Out of every $100 made, we spend $30 in paying for royalties and property tax. On top of that we have payroll, daily operating expenses, so it is a challenge,” Hendrix says.

Had to fix everything

At the time HEX acquired Furie, KLU was an underperforming field in need of fixing, but with considerable potential.

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 DNR’s Division of Oil and Gas.

“I took a gamble on buying KLU; I know that. But I figured I should be able to trust my state government to treat me fairly and help me navigate through the challenges of operating in the Cook Inlet,” he told PN. “Obviously, that’s not what’s happening at this time. The state agencies need to quit operating in silos and better cooperate and work with each other.”

Most active bidder

Hendrix has been the most active bidder in the Cook Inlet basin lease rounds for the last two years.

Hendrix was one of two companies in the 2021 lease bid round. In the most recent state Cook Inlet basin lease sale in May, 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.

Sterling opportunities

Furie under its previous owners brought the unit into production from a single well in November of 2015 and subsequently drilled three more production wells, with the last being the KLU A-4 well in October 2018.

By the time HEX took control, one of the four wells was offline, awaiting upgrades and repairs. And the three other producing wells were underperforming.

HEXs goal was, and continues to be, having all four existing wells producing natural gas from both the Beluga and Sterling formations, with much of the upside in the unproved Sterling. Currently two of the four wells are producing from the Beluga formation.

A produced water handling system was installed last year primarily for the Sterling formation. Furie had to first obtain the appropriate permits to allow production of gas zones with higher water content. This may result in increased gas recovery once the formation is brought on production, Hendrix said.

“We view the Sterling as a great opportunity; that is if we get this right and get it producing natural gas year-round, we might be able to add a year to the life to the field,” he said.

“The big thing is, proved reserves have to be economical and right now we’re testing to see if we can get it to that point.”

The Sterling is what cost the previous Furie owners $17 million when they froze the flowline in the winter of 2019 due to excess water production.

To remediate this issue, a produced water handling system was installed primarily for the Sterling formation, and appropriate permits obtained to allow production of gas zones with higher water content.

“We spent about $1.8 million on it,” Hendrix said. “Udelhoven installed it about a year ago.”

Furie first applied for the permit in March 2019. The permit was finally approved with an effective date of April 2021, another example of permitting hurdles required for Cook Inlet production.

“About two months ago we put the A-1 Sterling well into test. The test has been encouraging,” Hendrix said.

Since then, KLU A-2A and KLU A-4 have also been tested and evaluations are ongoing. The water handling equipment is currently processing about 2,100 barrels of produced water per day and is performing to spec, Hendrix said.

Because of the inability to comingle Beluga and Sterling production, HEX is strategically placing individual zones in test to minimize any disruptions to overall production, he said.

No hype involved

“Our company isn’t about hype. We’re not going to hype our reserve numbers,” Hendrix said.

Unlike many smaller oil and gas companies that are looking to raise money, he said HEX is not trying to attract investment money.

“A lot of people out there try to hype their so-called proved reserves in order to attract buyers or investors. … Our reputation is to be a good honest player and tell people how it is …. We’re just going to show them the facts,” Hendrix said.

“Alaskans need to know there is a difference between a non-SEC company stating what is proved reserves and a SEC stock listed company. Even though we are not a publicly listed company we strive to provide SEC proved reserves,” he said.

“We’ll continue to work with all the state agencies. We have regular meetings and they’re trying to work with us on how we can maximize our production.

“We’re having a lot of conversations with the Division of Oil and Gas and want to continue to learn from the state about our reservoir because it’s important to move away from hype and have actual data. Data that is technically viable, provable.”

“You must have science that backs up your data,” Hendrix said, likely referring to statements by previous KLU operators that declared what appeared to be high reserve numbers.

Hendrix said the state wants HEX to be competitive “and we’d like to be competitive, but our world isn’t an easy world.”

“And that’s probably why you don’t see more Cook Inlet lease sale bidders,” he said.

“The state of Alaska makes how many billions off oil and gas, yet the Department of Revenue has no definition for proved or proven or proved reserves. ... we’re hoping to help them get there some day,” he said.

Alternative Investments

Hendrix noted that Furie is “a small company with limited capital and must decide on the best investments for our capital.”

“And where am I going to put my money in the future? I want to continue putting it in Alaska, but even I have to look at alternative places. I have to diversify my portfolio. My allegiance is to Alaska, but Alaska’s got to have allegiance to us,” Hendrix said.

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