While Buccaneer Energy Ltd. is aiming for much bigger targets in Cook Inlet, it has been earning revenue for nearly two years from a small onshore gas field near Kenai.
The Australian independent brought the Kenai Loop field into production in early 2012 and the field was producing some 10 million cubic feet per day as of September 2013.
Drilling Kenai Loop
The relatively young independent arrived in Alaska in early 2010 by acquiring the Cook Inlet assets (and some of the executives) of independent Stellar Oil & Gas LLC.
The acreage included a non-contiguous block of State of Alaska, Cook Inlet Region Inc. and Alaska Mental Health Land Trust leases northeast of the Cannery Loop unit, which Buccaneer later supplemented to make a roughly 9,400-acre prospect. Before drilling, Buccaneer estimated the field contained “multiple stacked pay zone possibilities between 5,000 and 10,000 feet” and reserves between 35 billion and 78 billion cubic feet.
Using the Glacier No. 1 drilling rig, Buccaneer drilled the Kenai Loop No. 1 well in April 2011 to a total vertical depth of 10,680 feet. In June, the well flowed at a rate of 10 million cubic feet per day. The company said well logs indicated 510 feet of gross pay in the Beluga and Upper Tyonek, an estimate the company quickly upgraded to 645 feet.
An analysis from the consulting firm Ralph E. Davis Associates Inc. — looking at two sands, at 9,700 feet and 10,000 feet — estimated that the prospect contained 31.5 bcf of natural gas and 3.9 million barrels of oil equivalent in proven reserves.
In September 2011, Buccaneer used the Glacier No. 1 to drill the Kenai Loop No. 3 well to a total vertical depth of 11,000 feet to test the prospective zones identified in the first well. The well was a dry hole, which Buccaneer is now permitting for Class II disposal.
Online in January 2012
Despite the setback, Buccaneer brought Kenai Loop online in January 2012. After initial ramp up, the well started producing at some 5 million cubic feet per day, but the company said it was “confident that the well can be produced reliably at higher rates.” Buccaneer increased the rate to 6 mmcf per day in October and 6.5 mmcf per day in December.
Through the remainder of winter, the company permitted a 3-D seismic shoot covering some 25 square miles around Kenai Loop to improve its understanding of the prospect.
In June 2012, a Buccaneer subsidiary signed a three-year lease on Glacier No. 1 with an option to purchase, giving the company a rig for all its near-term onshore operations.
After incorporating the seismic results into its geologic model of the region, Buccaneer drilled the Kenai Loop No. 4 well to some 13,000 feet in September 2012. A test in January 2013 flowed at 3 mmcf per day. Buccaneer brought the well online in February at 2 mmcf per day. By March, the entire field was producing some 10 mmcf per day.
Unit request denied
In December 2012, Buccaneer applied to form a 7,500-acre unit over seven leases, but the Department of Natural Resources denied the request, saying its “primary propose” appeared to be “lease extension and not the efficient development of the unit area.”
In June 2013, Buccaneer renamed its Kenai Loop wells “to reflect their pad number.”
Under the new scheme, Kenai Loop No. 1 became Kenai Loop No. 1-1, Kenai Loop No. 3 became Kenai Loop No. 1-2 and Kenai Loop No. 4 became Kenai Loop No. 1-3.
In August 2013, Buccaneer started drilling the Kenai Loop No. 1-4, a 10,700-foot well targeting what “appears to be fault separated from the current producing zones in the Kenai Loop No. 1-1 and Kenai Loop No. 1-3 wells,” according to the company.
As of early September, Buccaneer was near total depth at the well. Buccaneer is aiming to bring the well online at 3 mmcf to 5 mmcf per day by the end of the year.
With the two existing wells draining only about 340 acres of the field, Buccaneer is likely to drill additional wells, according to a recent analysis from Canaccord Genuity.
Contracts and markets
The Kenai Loop field shows the challenges and opportunities for a small producer.
After testing Kenai Loop No. 1, Buccaneer secured a contract with Enstar Natural Gas Co. in August 2011 to provide firm commitments for the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula, then under construction and now in operation.
Under the contract, Buccaneer must deliver 5 mmcf per day to the facility, up to 12 mmcf per day by 2018. The contract allows Buccaneer to sell as much as 15 mmcf per day and 31.5 billion cubic feet by 2018 should Kenai Loop production increase. The contract is tied to the New York Mercantile Exchange gas futures with a ceiling of $10 per thousand cubic feet and a seasonally adjusted floor between $5.75 and $6.85 per mcf, with the floor and ceiling regularly adjusted for inflation.
Because Buccaneer expected the field to come online four months before the storage facility, Buccaneer also signed a short-term contract with ConocoPhillips in late 2011.
The unique contract gave Buccaneer the option to sell up to 2.5 bcf to the ConocoPhillips-operated liquefied natural gas terminal on the Kenai Peninsula. The contract came after ConocoPhillips mothballed the plant, but delayed the closing to accommodate four summer shipments and delayed it again for a shipment in October.
Volumes to daily winter auction
In addition to the ConocoPhillips contract, Buccaneer was able to sell uncommitted volumes into the daily winter auction, the Enstar spot market for peak demand days. In early 2013, the market price hit $22 per thousand cubic feet, according to Buccaneer.
When Buccaneer increased Kenai Loop No. 1 production in October 2012, it signed a two-month contract to sell 1 mmcf per day to an unnamed party for $7.50 per thousand cubic feet, net tariffs. Buccaneer signed a month-long contract in December to sell 500 thousand cubic feet to an unnamed party for $15 per thousand cubic feet, net tariffs.
Once those contracts expired, Buccaneer sold the additional volumes to Enstar, as it also did when Kenai Loop No. 4 brought total field production up to 8.5 mmcf per day.
To accommodate the anticipated production from Kenai Loop No. 4, Buccaneer and Enstar started negotiating a multiyear contract but also signed a short-term summer contract. Under the agreement, Buccaneer committed to provide between 4.37 mmcf and 5 mmcf per day from March 20 to Sept. 30, 2013, at $6.80 per mcf.
In July 2013, Enstar and Buccaneer signed the longer-term contract.
Under the deal, Buccaneer will provide 2.663 bcf at a “continuous rate” through June 30, 2016. The price starts at $6.80 per mcf and increases 4 percent annually.
Even though Buccaneer is currently selling all or mostly all of its Cook Inlet production, this history of cobbling together small, short-term contracts clearly concerns Buccaneer.
The company recently complained to the Regulatory Commission of Alaska about a proposed contract between Enstar and Hilcorp Alaska LLC, which, according to Buccaneer, would shut small producers out of the local utility market through early 2018.
On numerous occasions over the past few years, Buccaneer has suggested that it wants the option of being able to export any additional gas supplies as liquefied natural gas, but also wants policymakers to expand markets for Cook Inlet gas outside of Southcentral.
Financing stabilizing
The Kenai Loop field is the only revenue-generating asset in the Buccaneer portfolio of Cook Inlet properties, but the field is not yet producing enough to fund expansion work.
To pay for drilling, both at Kenai Loop and at other prospects, the publicly traded Buccaneer has used loans and stock placements, but in December 2011 the company also took the unusual step of using state tax credits to back a $50 million credit facility.
In early 2012, though, several Buccaneer contractors complained to the Kenai city council about unpaid bills for work performed at Kenai Loop. Buccaneer addressed the issue by taking out $50 million in additional loans and lines of credit in May 2012.
The bulk of the financing also covers other projects in the Buccaneer portfolio.
Concerned about the company becoming unfocused, a pair of shareholders called for a vote to replace the board of directors. The vote yielded a split, but the three challenging board members added to the board subsequently resigned without a public explanation.
Subsequently, Buccaneer farmed-out many prospects, which, along with the credit facilities, helped stabilize its wallet. The farm out covers eight wells at four exploration prospects, but Buccaneer retained its 100 percent working interest in Kenai Loop.
