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Vol. 15, No. 46 Week of November 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

The Explorers 2010: Cook Inlet basin

Alan Bailey

Petroleum News Senior Staff Writer

Cook Inlet, a major sea inlet between the Kenai Peninsula and the mainland of Southcentral Alaska, lies over part of a deep sedimentary basin that has formed between the Kenai Mountains and the mountains of the Alaska and Aleutian ranges. This basin, known as the Cook Inlet basin, became a focus of early Alaska oil and gas exploration, hosted the first major Alaska oil field and remains an active target for oil and gas exploration and production. In its entirety, the basin extends beyond Cook Inlet under the western side of the Kenai Peninsula, under the lower land on the west side of the inlet and under the waters of the Shelikof Strait.

A changing business scene

The oil and gas industry of the Cook Inlet basin has evolved continuously in the decades since oil started flowing from the Swanson River field on the Kenai Peninsula in 1960. But the start of a major eruption of the Redoubt Volcano on the west side of Cook Inlet in March 2009 seemed to herald a period of significant change in the business environment for Cook Inlet oil and gas.

The Redoubt eruption caused the temporary shut-in of the Drift River oil terminal, located at the base of the volcano and the only means of exporting oil from the west Cook Inlet oil fields. The terminal reopened in August 2009, with its tank farm bypassed and with tankers having to periodically offload oil piped to Drift River directly from storage tanks at production facilities at Granite Point and Trading Bay. The terminal shut-in caused the aging oil fields on the west side of Cook Inlet to also be shut-in for several months, resulting in an accelerated decline in already low oil production rates.

And, coincidentally, at around the time that Redoubt was starting to blow, Cook Inlet oil producer Pacific Energy, a 50 percent owner of the Drift River terminal, and of the Cook Inlet pipeline that delivers oil to the terminal, filed for bankruptcy. In addition to its interests in the terminal and pipeline, Pacific Energy owned substantial interests in oil and gas fields on the west side of the inlet.

Chevron, the other owner of the terminal and pipeline, obtained these facilities in 2005 when it purchased Unocal and all of Unocal’s Cook Inlet oil and gas fields, as well as Unocal’s production facilities. And, after intimating ambitious plans to extend the life of its offshore Cook Inlet oil fields and to explore for new oil reserves, in March 2008 Chevron drilled two wells to try to establish new oil reserves from the Anna platform in the Granite Point field, which lies on the west side of the Inlet.

But, after disappointing results from those wells and disruption to oil production as a consequence of the Redoubt eruption, the company’s Cook Inlet plans now seem uncertain.

In November 2009, citing the oil production decline and the impact of the bankruptcy of Pacific Energy Resources, Chevron announced that it was laying off 25 of its Cook Inlet staff.

New companies in the inlet

A month later Cook Inlet Energy, a subsidiary of Tennessee-based Miller Energy Resources, announced that it had purchased many of the Pacific Energy assets, including: the West McArthur River oil and gas field; the West Foreland gas field; the Redoubt oil field, with its Osprey offshore platform; the Kustatan onshore oil production facility; a 30 percent stake in the Three Mile Creek gas field; and more than 600,000 acres of exploration leases.

Cook Inlet Energy, run by ex-employees of Pacific Energy, has been successfully recompleting and restoring production from wells in its Cook Inlet properties, and in a May 2010 lease sale it acquired about 27,000 acres of additional state Cook Inlet leases. The company has also been embroiled in a dispute with Chevron over a hike in rates for the transportation of oil by pipeline to the Drift River terminal, following the disruption caused by the Redoubt eruption.

The company hopes to raise sufficient capital to drill five wells at West McArthur River over the coming year to increase field production by more than 2,000 barrels per day.

Cook Inlet Energy acquired two offshore prospects, Raptor and Sabre, from Pacific Energy and has expressed an interest in drilling in the Raptor prospect, and from the Osprey platform. However, this drilling appears to be contingent on raising the necessary capital.

On the more easterly side of the Cook Inlet basin, ExxonMobil quietly became an oil producer in the basin when it bought out XTO Energy in late 2009: XTO operates the aging Middle Ground Shoal oil field in the middle of the inlet. ExxonMobil has yet to make an announcement about any Cook Inlet plans that it might have — Middle Ground Shoal represents just a tiny piece of the total XTO takeover.

Meantime, onshore the Kenai Peninsula, Chevron has been continuing to draw oil from the aging Swanson River field.

Around April 2010 Houston-based independent Apache Corp. flagged an interest in the Cook Inlet basin by meeting with staff from the Alaska Department of Natural Resources and by attending a DNR technical conference. And in July 2010 the company picked up nearly 200,000 acres in leases scattered around the basin, purchasing the leases from a group of investors including Daniel K. Donkel and Samuel H. Cade. Apache has made offers for leases owned by some other Cook Inlet lease owners, including Escopeta Oil Inc., but at the time this publication went to press none of these offers had been accepted.

Offshore drilling requires jack-up rig

While the situation regarding existing oil and gas fields continues to evolve, there is considerable interest in exploring for oil and gas in some relatively large, known prospects that remain untested under the waters of Cook Inlet, in a geologic trend that extends southwest from ConocoPhillips’ venerable North Cook Inlet gas field, the offshore field that was established as the primary gas source for the Nikiski LNG plant on the Kenai Peninsula.

The offshore prospects include Northern Lights, Corsair, Kitchen and East Kitchen.

The Northern Lights prospect lies in a down dip extension of the undeveloped Sunfish oil discovery underneath the North Cook Inlet field. Corsair, in the middle of Cook Inlet to the southwest of Northern Lights, consists of a large NNE-SSW trending anticline with both gas and oil possibilities in multiple horizons. Kitchen lies along the same structural trend, southwest of Corsair. East Kitchen lies in an anticline about six miles northeast of Port Nikiski.

The only one of these prospects that has ever been drilled is Corsair, where Shell, Phillips and ARCO drilled a total of five exploration wells between 1962 and 1993. The wells all had gas shows and some also tested small quantities of oil.

Unfortunately, drilling in any of the prospects would require bringing a jack-up rig to Cook Inlet, probably from the Gulf of Mexico, an expensive and financially risky undertaking.

Independents push for jack-up

However, for several years Houston-based independent Escopeta Oil, under Danny Davis, its president, has been championing the cause of using a jack-up rig to drill some new exploration wells in Cook Inlet. Escopeta has particularly focused on the Kitchen prospect, where Davis thinks that there might be 7.5 trillion cubic feet of natural gas and 1.7 billion barrels of oil, although the state has classified the prospect as “highly speculative.”

In early 2006 Escopeta secured the use of a jack-up rig and subsequently obtained an unprecedented waiver to the Jones Act to enable the company to bring the rig to Cook Inlet from the Gulf of Mexico on a foreign-flagged vessel. But the company then ran into problems shipping the rig north and postponed its drilling plans.

Subsequently Pacific Energy, having obtained the Corsair unit as part of its purchase of Forest Oil’s Cook Inlet properties in 2007, determined that it would try to bring a jack-up to the inlet for the open-water season of 2008, to conduct a drilling program in conjunction with Escopeta and Renaissance Alaska, the company that by this time had become operator of the leases at Northern Lights.

But all came to naught in 2009 when Pacific Energy began disposing of its Cook Inlet assets through a Delaware bankruptcy court.

Meantime, frustrated by the lack of progress toward offshore drilling and anxious to encourage exploration of the offshore prospects, Alaska’s Division of Oil and Gas started engineering a deal in which existing units and leases at Northern Lights, Corsair and Kitchen would be combined into an expanded single unit called “Kitchen Lights,” with Escopeta as operator. Escopeta had farmed in Corsair from Pacific Energy, and Northern Lights from Renaissance and Rutter and Wilbanks.

Texas-based Renaissance Alaska LLC transferred its Northern Lights leases to Escopeta as part of the deal to form the Kitchen Lights unit. But Renaissance also held 10,008 acres in state Cook Inlet offshore leases that covered the company’s North Middle Ground Shoal and Northwest Cook Inlet prospects, as well as 47,582 acres on the Kenai Peninsula on its onshore North Sterling and West Eagle prospects.

Buccaneer Energy

Then, in March 2010, Buccaneer Alaska, a subsidiary of Australian company Buccaneer Energy, entered the Cook Inlet oil and gas business by purchasing all of Renaissance’s remaining leases, which by that time had been transferred to a company called Stellar Oil and Gas.

In a May 2010 state areawide lease sale Buccaneer bought additional leases adjacent its lease positions on the Kenai Peninsula and in Cook Inlet, and on land west of Nicolai Creek on the west side of the inlet. The company has also been trying to acquire Cook Inlet Region Inc. and Alaska Mental Health Trust oil and gas leases northeast of the city of Kenai, in hopes of drilling there in 2011. The company plans to permit a 2011 well in the West Eagle prospect, east of Nikolaevsk in the southern Kenai Peninsula, perhaps benefiting from some new gas infrastructure associated with the under-development North Fork gas field. Buccaneer apparently sees the possibility of a 12-well development program at West Eagle. And on the west side of the Cook Inlet, a planned 2011 well at the West Nicolai Creek prospect could lead to a four-well program tied into the nearby Aurora Gas Nicolai Creek field.

Buccaneer has been promoting two of its offshore prospects, Southern Cross (previously called North Middle Ground Shoal) and Northwest Cook Inlet, both of which would need to be drilled from a jack-up rig. The company has described the Southern Cross prospect as a “northward continuation of the Middle Ground Shoal field,” while the Northwest Cook Inlet prospect is located north and northeast of the ConocoPhillips-operated North Cook Inlet gas field.

In July 2010 Buccaneer applied to the Alaska Department of Natural Resources to form units at both Southern Cross and Northwest Cook Inlet.

Buccaneer says that it has licensed 51 square miles of seismic data over Southern Cross and plans to drill an initial well in the prospect by Sept. 30, 2012, with the intent of seeking gas in the Tyonek formation and oil in the Hemlock.

Also by Sept. 30, 2012, Buccaneer plans to drill a well in its Northwest Cook Inlet prospect, a gas prospect where the company has about 1,000 miles of 2-D seismic, as well as data from some existing wells on the North Cook Inlet structure.

Buccaneer appears to have been encouraged in its exploration plans by a $25 million jack-up rig tax credit that the Alaska Legislature passed in the 2010 legislative session. To qualify for the tax credit, a well must penetrate the older Mesozoic rocks of the basin, something that Buccaneer has said that it plans to do when it drills its first well at Southern Cross.

But there’s still no sign of a jack-up rig making its way north towards the Cook Inlet.

The plan of exploration for the Kitchen Lights unit, approved in 2009, required Escopeta to have a jack-up rig under contract and on its way to Alaska by June 30 2010, and to have a well drilled in the unit by year end. In May 2010 Davis asked the Alaska Division of Oil and Gas for a 180-day extension to the June deadline, saying that that he was experiencing difficulty in contracting a rig. And on July 19 the division placed Kitchen Lights into default, rather than terminate it, and required Escopeta to have a jack-up rig heading for Alaska by the end February 2011, to drill a well by the end of September 2011. Escopeta also has to pay the state a $4 million security deposit for Escopeta’s cost of moving a rig on a heavy-lift vehicle bound for Alaska.

Apache has made an offer for Escopeta’s leases, but so far the two companies have not come to a deal over this — in June Davis told Petroleum News that the Apache offer was too low but that a deal might still be possible.

Oil remains exploration target

Although in recent years Cook Inlet basin exploration has tended to focus on natural gas rather than oil, there is still a market for oil, especially for use in Tesoro’s Nikiski refinery on the Kenai Peninsula. And there is at least some evidence for renewed oil interest in the region.

Apache has said that the likelihood that significant undiscovered oil resources exist in the basin is the prime driver for its interest in the region; Buccaneer hopes to drill for oil in the Hemlock formation in its offshore Southern Cross prospect; and Armstrong Cook Inlet has expressed an intent to drill for oil below its North Fork gas field in the southern Kenai Peninsula.

Pioneer Natural Resources is investigating the feasibility of developing a known oil accumulation in the Cosmopolitan unit, offshore west of the southern Kenai Peninsula near Anchor Point. The field would be developed from onshore using extended-reach drilling if Pioneer sanctions it. Oil from Cosmopolitan would probably be trucked to Nikiski.

In 2007-08 Pioneer successfully drilled the Hansen 1A-L1 sidetrack well at Cosmopolitan and tested the production of 400 to 500 barrels per day of oil. The drilling also found the potential for some gas production, probably through a 16-mile pipeline that would have to be constructed to connect with the Kenai Kachemak pipeline to the north.

Pioneer had planned to drill a second Cosmopolitan delineation well in 2009, but the collapse of oil prices in the wake of the evolving 2008 world economic crisis caused the company to place its drilling plans on hold. However, in January 2010, the company moved forward again on the project by doing a workover and some flow testing on its Hansen sidetrack. And, although Pioneer has not yet decided whether to proceed with development at Cosmopolitan, in April 2010 the company submitted detailed plans for the project to the Alaska Department of Natural Resources and to the U.S Minerals Management Service — those plans indicated possible peak production of 8,000 barrels per day from the field.

Gas producers look for new resources

Marathon, ConocoPhillips and Chevron are the main producers of natural gas from the Cook Inlet basin.

For several years Marathon has been carrying out a program of infield drilling to sustain gas deliverability from its existing gas fields, primarily from the Kenai and Ninilchik fields on the Kenai Peninsula, using its own Glacier 1 rig. However, the company has been evaluating a gas prospect called Sunrise in the northern part of the Kenai Peninsula. Also known as East Swanson, the prospect lies in a Cook Inlet Region Inc. holding inside the Kenai National Wildlife Refuge.

The company acquired some 2-D seismic for the prospect and subsequently completed the Sunrise LK2 well to a vertical depth of 9,798 feet in February 2010. Marathon has not released the results of its drilling.

In 2008 and 2009, following renewal of the export license for the ConocoPhillips and Marathon owned LNG plant on the Kenai Peninsula, ConocoPhillips drilled two new development wells in its offshore North Cook Inlet gas field and three wells in the Beluga River gas field on the west side of the inlet.

Chevron drilled two development wells in the Grayling gas sands on the west side of Cook Inlet in 2008. And on the Kenai Peninsula, Chevron used the Nabors 106E rig to drill a new gas development well in the aging Swanson River field, and to drill two gas development wells in the Happy Valley field.

In 2009 the company drilled two field delineation wells, one in the Ivan River gas field and the other in the Stump Lake gas field, both on the west side of the Cook Inlet.

On the southern Kenai Peninsula, Chevron’s exploration efforts in the Nikolaevsk unit are on hold while the company appeals a state ruling rejecting a recent plan of development.

In November 2009 Chevron said that it was planning to build a road to the shut-in, single-well Birch Hill gas field, near the Swanson River field in the northern Kenai Peninsula, and to do some testing there in 2010. However, that drilling does not appear to have taken place and in September 2010 Chevron told Petroleum News that it was “still assessing alternatives” for the project.

Independents explore for gas onshore

Houston-based Aurora Gas was formed in 2000 to pursue natural gas opportunities in the Cook Inlet region, mainly focusing on known, relatively shallow gas plays. The company operates five gas fields on the west side of Cook Inlet: the Kaloa, Lone Creek, Moquawkie, Three Mile Creek and Nicolai Creek fields.

After a nearly two-year hiatus in drilling activity as a result of litigation over a suspended gas supply contract with Enstar Natural Gas. Co., the Southcentral Alaska local distribution company, Aurora Gas restarted operations with its AWS-1 rig in the late summer of 2008, subsequently doing some development and workover drilling in its gas fields, including new wells in its Nicolai Creek and Kaloa fields, and a well recompletion in its Moquawkie field.

Aurora Gas has a joint venture agreement with Swift Energy Co. for exploration drilling on Aurora acreage in the Cook Inlet basin. The joint venture drilled a dry wildcat well in the Endeavour oil prospect near Anchor Point on the Kenai Peninsula in 2006. Then, as a result of a change in exploration focus by Swift and a lack of interest by Kaiser Francis Oil Co., Aurora’s major owner, in further Cook Inlet exploration drilling, Aurora placed its exploration ideas on hold. However, in 2009 the company found partners to help fund an exploration well at the Hanna prospect on the west side of Cook Inlet, although following a permitting glitch that well was not drilled.

And Aurora has applied to DNR for unitization of some state and Cook Inlet Region Inc. leases around the old Cohoe well northeast of Kasilof on the Kenai Peninsula. Cohoe, originally an oil exploration well, did find evidence of gas in a higher horizon than the oil prospect — Aurora wants to shoot some new 3-D seismic around the prospect and perhaps drill a new gas exploration well.

North Fork

In 2008 Armstrong Cook Inlet LLC, the Alaska affiliate of Denver-based Armstrong Oil and Gas Co., successfully drilled a delineation well in a known gas pool in the North Fork unit on the southern Kenai Peninsula. And in November 2009 the Regulatory Commission of Alaska approved a contract for the supply of North Fork gas to gas utility Enstar Natural Gas Co.

The contract requires Enstar to construct a gas pipeline south from the Kenai Kachemak pipeline to Anchor Point, northwest of Homer. Anchor Point Energy, a company owned by the five working interest owners of the North Fork unit, has committed to build a pipeline west from North Fork to connect with the new Enstar line, and to drill two new gas wells at North Fork.

Armstrong, the operator of the North Fork field, has permitted the two new wells and has also expressed an intent to drill deep with one of those wells, looking for oil in the Hemlock formation.

Permitting of the pipeline from North Fork has been moving ahead, with the intent of bringing the field on line in March 2011. The pipeline will open a gas supply for residents of the small Anchor Point community, as well as connecting a new gas source to Southcentral Alaska gas infrastructure and perhaps providing a market outlet for associated gas from Pioneer’s Cosmopolitan oil field, offshore Anchor Point. And the State of Alaska is funding the construction of a gas pressure station unit and a short pipeline near Anchor Point, as the first step towards a gas supply for the town of Homer about 12 miles away.

The new pipelines connecting to North Fork will also open up the possibility of developing other gas prospects in the southern Kenai Peninsula.

In March 2010 Australian independent Linc Energy entered the Alaska oil and gas industry when it purchased the Cook Inlet basin leases owned by GeoPetro, a lease holding amounting to 122,000 acres spread over two onshore blocks on either side of the northern end of Cook Inlet.

Linc is moving forward on a project started by GeoPetro to drill a gas exploration well, the Frontier Spirit No. 1, to test a gas prospect in the middle and lower Tyonek formations, at a depth of about 8,000 feet in an 11,500-acre structure near Point MacKenzie, a few miles northwest of Anchorage. GeoPetro, having reprocessed some old 2-D seismic, had identified a target that the company thought might hold as much as 1 trillion cubic feet of natural gas.

Most exploration in upper Cook Inlet Tertiary

There are two major sequences of hydrocarbon-bearing rocks in the Cook Inlet basin: a younger and shallower sequence that is Tertiary in age, and an older and often deeper sequence that is Mesozoic in age. And the basin is generally divided into two major regions: the upper Cook Inlet basin north of the southern end of the Kenai Peninsula and the lower Cook Inlet basin extending southwest from the southern limit of the upper basin.

The upper Cook Inlet basin has been the prime focus of oil and gas exploration and is the only part of the basin with producing oil and gas fields.

This part of the basin attains its greatest depth near the northwest corner of the Kenai Peninsula. In that area about 25,000 feet of Tertiary, coal-bearing, terrestrial sediments overlie a thick sequence of marine Mesozoic sediments. The rocks include an abundance of hydrocarbon sources, reservoirs and traps.

A broadly similar sequence of Tertiary rocks extends across the whole upper Cook Inlet area, but thins toward the edges of the basin and toward the lower basin.

Oil exploration in the area initially targeted the Mesozoic strata but the 1957 discovery of the Swanson River oil field in Tertiary sediments shifted the attention of subsequent exploration to the Tertiary. To date there have been 11 significant oil finds and 28 significant gas finds in the upper Cook Inlet area, with all of the finds occurring in the Tertiary — all of the oil and gas produced in Southcentral Alaska comes from these fields.

Major geologic trends

And because the geologic stresses that have operated during the evolution of the basin have tended to fold and fracture the rock strata along a northeast-to-southwest trend, the oil and gas fields in the basin tend to line up along that trend, following the crests of large geologic structures.

The largest oil field in upper Cook Inlet, the McArthur River field, had produced 628 million barrels of oil by the end of 2008, with ultimate recoverable oil reserves of about 646 million barrels, according to data published by Alaska’s Division of Oil and Gas. The largest gas field, the Kenai field, had produced 2.355 trillion cubic feet of gas with ultimate recoverable reserves of about 2.458 tcf.

Although the reservoirs of the Cook Inlet oil and gas fields lie within Tertiary rocks, petroleum geologists have determined that most of the oil actually originated from source rocks in the Mesozoic, in what geologists refer to as the middle Jurassic. On the other hand, although some gas would have been generated by thermal processes from Jurassic source rocks along with the oil, most of the gas originated by itself from bacterial processes in coal-rich Tertiary sediments.

Cook Inlet exploration has mainly targeted large structures in the Tertiary, and some undiscovered oil accumulations probably remain in this type of setting. However, some geologists believe that substantial quantities of oil lie within Mesozoic reservoirs. But, given the expense and relative risk of deep drilling, very few wells have targeted this Mesozoic play.

In legislation passed in 2010, the State of Alaska now offers up to $67.5 million in tax credits for wells drilled from a Cook Inlet jack-up rig into the Mesozoic. The first company to drill a well of this type will receive a credit of 100 percent of costs, up to $25 million; the second 90 percent, up to $22.5 million; the third 80 percent, up to $20 million.

A 2004 study by the U.S. Department of Energy has also pointed out that the exploration of large oil-bearing structural traps has probably left undiscovered many gas accumulations in the Cook Inlet basin. From a statistical analysis of the known gas accumulations, DOE has estimated that there may be as much as 10 tcf to 14 tcf of undiscovered natural gas in the Tertiary of the upper Cook Inlet area. DOE believes that much of this undiscovered gas lies in the stratigraphic and combination traps that people exploring for oil largely ignored.

Focus on subtle gas plays

With the exception of some undeveloped offshore prospects, exploration for new hydrocarbon accumulations has tended to move away from the big structures, many of which have been drilled and produced. Attention is now starting to focus on subtle, off-structure plays that may contain some of the huge quantities of Tertiary gas thought to still exist in the Cook Inlet basin.

The poor quality of the seismic data for the Cook Inlet area has become an issue when searching for these subtle stratigraphic plays. The thick Tertiary section contains many coal seams and exhibits big density contrasts. This type of geology dissipates seismic energy and gives poor seismic reflections. It has even proven difficult to apply modern 3-D seismic techniques for delineating stratigraphic traps.

Considerable effort is now going into gaining a better understanding of how best to use 3-D techniques in the Cook Inlet geological situation, especially in the deeper parts of the section. And Alaska’s Division of Geological and Geophysical Surveys is engaged in a multiyear Cook Inlet basin research project, with the geology of stratigraphic traps as a major focus.

The difficulty in interpreting seismic data, the need to search for subtle traps and uncertainties about the lateral continuity of subsurface rock strata make Cook Inlet a challenging area to explore — problems with reserve estimation in the Redoubt Shoal field have illustrated some of the risks in reservoir assessment with less than complete subsurface information.

In addition, onshore land access can prove complex because of a multiplicity of land ownership arrangements. However, companies are managing to handle the complexities of dealing with geology that doesn’t always line up with land ownership boundaries. On the other hand, the Kenai National Wildlife Refuge does limit exploration access to substantial areas of land on the Kenai Peninsula.

The Susitna basin

Much of the broad area of lowland stretching north from the northeast end of Cook Inlet and crossed by the Susitna River and its various tributaries, as well as by lesser waterways, lies over another basin, referred to by geologists as the Susitna basin and forming what some consider to be a northern extension of the Cook Inlet basin. A major geologic fault, the same fault that delineates the northwest side of the Cook Inlet basin, divides the two basins.

Tertiary rocks, many corresponding to similar rocks in the Cook Inlet basin, occupy the Susitna basin, but the oil-prone Mesozoic source rocks of the Cook Inlet basin have not been found in wells or outcrops in the Susitna Valley.

Seismic data from the Susitna basin have revealed geologic structures dominated by faulting rather than folding, where vertical displacements of blocks of the older rocks that underlie the basin have dislocated the younger Tertiary rocks above.

Nine oil and gas exploration wells and four core holes have been drilled in the Susitna basin. All exploration wells were plugged and abandoned as dry holes, though some did have minor gas shows. The two wells drilled near the deepest part of the basin were the Union Texas Pure Kahiltna Unit No. 1, completed in March 1964 to a total depth of 7,265 feet, and the Unocal Trail Ridge Unit No. 1, completed in October 1980 to 13,708 feet. Coal beds become prominent in the lower part of both of these wells, suggesting a correlation with the coal-bearing, gas-producing formations in the Cook Inlet basin.

Coalbed methane

The prevalence of coal seams in the Tertiary rocks around the Cook Inlet and Susitna basins gives rise to a major resource potential from coalbed methane.

But exploration for coalbed methane in Southcentral Alaska has proved controversial because of issues surrounding split estate land ownership between the State of Alaska and private landowners, and because of worries by local residents about environmental issues, especially ground-water contamination. However, the increasing demand for new gas sources together with new coalbed methane production technologies involving the use of horizontal drilling, coupled with improved guidelines for coalbed methane exploration and development, may lead to successful commercialization of this resource.

Aurora Gas has expressed an interest in testing the development of coalbed methane from coal seams above its Moquawkie gas field in a remote area on the west side of the Cook Inlet.

Underground coal gasification

In October 2009 Cook Inlet Region Inc. announced plans to develop a 100-megawatt power plant fueled by gas generated by the underground gasification of coal seams in CIRI land in the Beluga area on the west side of the Cook Inlet.

Underground coal gasification, or UCG, involves the pumping of compressed air into a coal seam deep underground to enable the controlled underground combustion of some coal; the heat from the burning converts excess air and the bulk of the coal to synthetic gas for delivery to the surface through production wells. Under CIRI’s plan, carbon dioxide in the gas would be stripped out for enhanced oil recovery from Cook Inlet oil fields, while the remaining combustible components of the gas would provide a valuable replacement for tightening supplies of Cook Inlet natural gas, as a power generation feedstock.

In June 2010 CIRI announced the formation of a joint venture with Houston-based Laurus Energy to build the UCG facility.

Also in June 2010, the Alaska Mental Health Trust Lands Office announced that it would offer 190,000 onshore acres spread across the Denali Borough, the northern and western Cook Inlet basin and the northern Kenai Peninsula for licensing to exploration companies interested in producing natural gas through the gasification of deep coal deposits. And in August 2010 the Alaska Oil and Gas Conservation Commission formally took over authority to regulate wells drilled for UCG exploration.

Linc Energy, the newcomer to the Alaska oil and gas industry that is planning to drill a conventional gas exploration well near Point Mackenzie in the northern part of the Cook Inlet basin, specializes in underground coal gasification. The company has said that it believes that large quantities of coal suitable for gasification lie under its oil and gas leases but it has not indicated any plans to pursue a coal gasification project in Alaska.

Cook Inlet region offers opportunity and challenge

Nearly all of the oil and gas fields in Cook Inlet derive from exploration done in the 1950s and 1960s, before the discovery of the giant Prudhoe Bay field caused the attention of explorers to switch to the North Slope. As a consequence, only limited exploration of Cook Inlet has taken place in more recent decades.

Although past exploration in the region focused primarily on finding oil, large volumes of gas were also encountered during that drilling effort. A resulting excess supply of stranded natural gas drove the construction of LNG and fertilizer plants at Nikiski on the Kenai Peninsula and has enabled the residents of highly populated Southcentral Alaska to enjoy cheap gas for heating and electricity generation.

In recent years, as production from old oil and gas fields has declined, demand for gas has started to come into balance with supply, while the price of gas in Southcentral Alaska has begun to rise, thus heightening new interest in gas exploration in the Cook Inlet basin.

In 2008 the U.S. Department of Energy granted a two-year extension to the export license for the LNG plant from 2009 to 2011. And the owners of the LNG facility (Marathon and ConocoPhillips) agreed to do some new Cook Inlet gas drilling as part of a deal with the State of Alaska that ensured state support for the license extension.

In June 2010 the facility owners asked DOE for a two-year extension to the license, an extension that would run through to March 31, 2013. The owners said that the license extension would enable them to export the remainder of the gas that had been approved in 2008 for export and that no additional volumes of gas were involved. The reduction of the LNG carrier fleet serving the facility from two vessels to one had slowed the rate of LNG export, thus making it impossible to export by 2011 the complete volume of gas approved in the current license, the owners said.

At the time of going to press, DOE had not issued a decision on the license extension request.

Agrium, the owner of the Nikiski fertilizer plant, closed the plant in 2007 because of a lack of adequate gas supplies at viable prices. Agrium investigated coal as an alternative feedstock to natural gas for fertilizer production, but said in March 2008 it had determined that its proposed coal gasification facility to supply syngas for the plant was not economic. However, new gas discoveries in Southcentral Alaska or gas from a possible future gas pipeline carrying North Slope gas to the Kenai Peninsula might result in the fertilizer plant being reopened, Agrium has said.

Industrial underpinning

Industrial facilities such as the Nikiski LNG plant underpin the Cook Inlet gas industry by providing a large and relatively stable market for the gas. And, as part of the state’s deal with the LNG plant owners at the time of the LNG export license renewal, the owners agreed to allow gas producers other than themselves to supply some of the gas used by the plant.

Local gas and power utilities are the other main purchasers of Cook Inlet natural gas. But these utilities constitute quite a small market, with a gas demand that fluctuates widely between warm summer days when gas usage is relatively low, to frigid winter conditions when gas usage, especially for space heating, soars.

The LNG plant provides an invaluable service by curtailing liquefaction of export gas during severe winter cold, to enable gas producers to meet the exceptionally high gas deliverability requirements of the utilities. And, also to bolster winter gas deliverability, Marathon and Chevron operate gas storage facilities that use depleted gas reservoirs to store excess gas produced in the summer for later use during the winter.

New gas storage

Cook Inlet Natural Gas Storage Alaska has embarked on a project to build a gas storage facility, using depleted gas sands in the Cannery Loop field on the south side of the city of Kenai. This facility, with operation planned to start in the summer of 2012 to head off anticipated gas deliverability shortfalls in the following winter, still requires Regulatory Commission of Alaska approval but would provide storage services to third-party businesses. Utilities Enstar Natural Gas Co., Chugach Electric Association and Municipal Light & Power would be initial customers.

CINGSA is a joint venture between MidAmerican Energy Holdings Co. and Semco Energy, the parent company of Enstar.

Aurora Gas has also proposed developing a gas storage facility for third-party use in a depleted reservoir in the company’s Nicolai Creek gas field on the west side of the Cook Inlet — in August 2009 the company held an open season, to test the potential market for this facility and is in the process of negotiating a gas storage lease with the Alaska Department of Natural Resources.

In addition to alleviating winter gas deliverability shortfalls, third-party storage facilities of the type that CINGSA and Aurora hope to build could provide new market outlets for independent gas producers wishing to sell gas to Southcentral Alaska utilities.

Gas badly needed

And new natural gas production from Cook Inlet is badly needed, given the dependence of Southcentral Alaska residents and businesses on gas for heating and power. Despite assuming the cessation of exports from the LNG plant after 2011 and despite also assuming the continued development of existing gas fields, projections of total Cook Inlet gas production show a shortfall relative to utility demand after 2019, Kevin Banks, director of Alaska’s Division of Oil and Gas, told the Alaska House Special Committee on Energy in March 2009.

A report prepared by division scientists and published in late 2009 indicated that current Cook Inlet gas reserves might meet supply needs until around 2015, but that development drilling to establish fairly certain new reserves around existing fields could delay the gas shortfall to nearly 2020. The development of less certain new reserves might further delay the shortfall to somewhere between 2020 and 2025.

A study conducted by Petrotechnical Resources of Alaska for utilities Enstar Natural Gas Co., Chugach Electric Association and Municipal Light & Power and published in March 2010 looked at the economics of developing new Cook Inlet gas reserves. This study concluded that the maintenance of adequate Cook Inlet gas supplies though developments around existing fields would require the drilling of more and more wells each year, with a total of 185 new wells at a total cost of $1.9 billion to $2.8 billion needed to maintain supplies through to 2020. In the absence of a successful near-term drilling program, utility gas supplies will start to fall short in 2013, the report says.

Meantime winter gas deliverability has become especially tight: On Jan. 3, 2009, Enstar Natural Gas Co., the main Southcentral Alaska gas utility, hit a peak daily throughput of 314.5 million cubic feet, causing the LNG plant to reduce its daily gas consumption to just 40 million cubic feet, a volume that Enstar said was close to the lower limit for the plant.

Market challenges

But some significant market challenges face an explorer wishing to find and produce new Cook Inlet natural gas reserves.

In the first place, with virtually all existing utility gas supplies tied up in medium- and long-term contracts between the utilities and a relatively small number of established gas producers, it is very difficult for a new market entrant to find a sufficient market to render a new gas field viable. There is no effective spot market for gas in Southcentral Alaska.

And then, in the absence of a spot market, there is the tricky question of pricing the gas. Because the gas price forms the dominant component of the price that Southcentral Alaska consumers pay for energy, and because regulated utilities supply that energy, the Regulatory Commission of Alaska, the state’s regulating agency, in effect regulates Cook Inlet basin utility gas prices. A series of challenges to pricing in new utility gas supply contracts in recent years resulted in what one RCA commissioner characterized as “the Cook Inlet Gas War.”

However, although a lively debate continues about appropriate pricing for Cook Inlet natural gas, RCA’s 2009 approval of two utility gas supply contracts, followed by the commission’s approval in 2010 of two further contracts, gives rise to hope that there is at least some form of truce in the gas contract combat zone.

Geology of Cook Inlet region

The surface topography of volcanoes, mountain ranges, flatlands and sea passages around the Cook Inlet area provides dramatic evidence of the way in which major pieces of the Earth’s crust, known as plates, move around the Earth’s surface, tossing up mountain ranges in places and dragging down deep basins in others.

One of the plates, the Pacific plate, slides north along the California and Pacific Northwest coastlines before slipping beneath another plate, known as the North American plate, along a zone marked by the Aleutian trench, south and east of Kodiak Island and the Alaska Peninsula. The massive forces unleashed by this titanic struggle between two of the larger pieces of the Earth’s crust have uplifted a chain of coastal mountain ranges, including the Chugach and Kenai mountains, while heat generated deep underground has caused lava and ash to spew up through an arc of volcanoes, known as the Aleutian archipelago. And as the Pacific plate has slid downward beneath the Earth’s surface it has dragged down an elongated section of the North American plate to form the Cook Inlet basin.

Two rock sequences

There are two major sequences of hydrocarbon-bearing rocks in the basin.

The events that led to the formation of the first of these sequences began around 350 million years ago, when a volcanic arc in the general vicinity of the present-day Alaska Range poured lava and volcanic materials into adjacent areas. Then, around 240 million years ago, uplift of the area occupied by the volcanic arc started tipping sediments south into a marine basin in the area of the current Cook Inlet. As this basin slowly subsided beneath an ancient sea, many thousands of feet of stratified marine sediments, some rich in organic material, accumulated.

These older and deeper strata of the Cook Inlet basin are referred to as the Mesozoic.

Uplift of the land around 70 million years ago started to form the Kenai and Chugach mountain ranges. Erosion of the mountains then dumped sediments into a Cook Inlet basin that was by then above sea level. Deposition of river-borne sand and gravel alternated with luxuriant swamp vegetation growth. Through this repetitive cycle of vegetative growth and sediment deposition, peat layers were developed and buried, producing present-day coal formations. The nonmarine sands and gravels would later become oil and gas reservoirs in what is referred to as the Tertiary section.

Uplift, accompanied by deformation and fracturing of the rocks, continues today, thus making Cook Inlet a seismically active region. As a result of a massive earthquake in March 1964, most of the western Gulf of Alaska including Prince William Sound was uplifted while the entire Cook Inlet basin from the Talkeetna Mountains to Kodiak Island sank. Areas of active volcanism still exist and are considered to have high geothermal potential.

Fault bounded

The present day Cook Inlet basin sits between two northeast- southwest trending geologic faults that form massive fractures in the Earth’s crust, where the rock strata inside the basin have sunk and tipped inward. One fault runs along the northwest side of the Kenai Mountains, while the other fault runs parallel to the northern Cook Inlet shoreline a few miles onshore.

An area of uplifted rock known as the Augustine-Seldovia arch, under Cook Inlet west of the southern tip of the Kenai Peninsula, divides the upper Cook Inlet basin from the lower Cook Inlet basin. The Mesozoic section contains oil-prone source rocks, including known oil sources in what geologists refer to as the middle Jurassic Tuxedni Group. The Tertiary section contains abundant coal seams and other organic-rich sediments that form a source of gas formed by bacterial action, rather like methane bubbling from a dung heap.

Both the Mesozoic and the Tertiary contain potential oil and gas reservoir rocks, although in the Mesozoic strata rock compaction combined with various forms of chemical and thermal alteration may have degraded the reservoir quality. Many sands in the Tertiary strata have excellent reservoir characteristics, although the way in which these sands were deposited from rivers and lakes has tended to result in reservoirs divided into many thin, lens-shaped compartments.

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