Sunday, November 27, 2011

Rebirth in Cook Inlet? CIRI says more infrastructure needed; CIE calls access ‘progressivity’ of inlet

Kristen Nelson
Petroleum News

There is more oil and gas exploration and development activity in Cook Inlet currently than the basin has seen in many years.

The Resource Development Council heard two perspectives on this activity at its annual conference in Anchorage on Nov. 17. Both were focused on oil rather than natural gas.

Ethan Schutt, senior vice president of land and energy development for Cook Inlet Region Inc., said CIRI has been promoting Cook Inlet development since it was formed.

JR Wilcox, president of Cook Inlet Energy, which was formed and took over operations after Pacific Energy went bankrupt in 2009, focused on the last couple of years.

CIRI is a major landholder in Cook Inlet.

Schutt said CIRI has always been a proponent of Cook Inlet as an oil and gas basin and in the last four or five years has been “pushing hard to get people to pay attention to Cook Inlet.” He noted that with the exception of Escopeta-Furie, all the speakers on the RDC Cook Inlet panel were CIRI lessees in one form or another, “some major, some minor.”

One CIRI lessee missing from the panel was NordAq Energy, Schutt said, noting that NordAq had a significant gas discovery on CIRI leases on the west side of the Kenai National Wildlife Refuge.

Because of its subsurface holdings, he said, CIRI gets “an inside look at what’s going on in this basin.”

“And I think it can’t be overstated that this is a very important moment in time and it is the early phases of a renewed interest in oil and gas potential in this basin.”

He said the interest of Apache in “coming to this basin and shooting an enormous 3-D seismic program” is significant because of Apache’s size and in-house technology. Schutt said he believes that seismic shoot will result in new oil production in commercial volumes.

Value to state

Schutt said that in discussions of the distinctions between the North Slope and Cook Inlet, state revenues are often left out of the equation. He said much of the remaining oil potential on the North Slope is on federal acreage, so if projects can get permitted and into development it’s great for jobs and getting throughput into the trans-Alaska oil pipeline, “but it’s not as great for revenue into the state government coffers.”

“One of the places where this state government can see real potential for royalties and taxes from oil production is here in Cook Inlet because the oil potential in Cook Inlet is in state land,” Schutt said.

While there is much discussion of roads to resources on the North Slope, one thing that would really help drive down the cost of exploration and development on the west side of Cook Inlet is a road-to-resources road, he said.

“We can’t focus all of our efforts on prizes that are up on the North Slope and in the North Slope offshore when one of the things that would most benefit us here in Southcentral would be infrastructure supporting oil and gas development here,” Schutt said.

The other thing that’s needed in Cook Inlet is improved port facilities on the west side, up near Beluga and at West Forelands. Without port infrastructure and road access, it makes oil and gas exploration more difficult and more expensive, he said.

Unexplored potential

Cook Inlet is “an amazing basin that has, amazingly, a whole interval of geological potential that’s basically never been explored,” Schutt said.

Oil was found at relatively shallow depths during early exploration, so explorers didn’t go deep, he said.

“If you drill to bedrock in Cook Inlet you’re going to go through two or three zones of oil potential and there is a whole zone down at the bottom that has two or three exploration wells in the entire history of the basin.”

While Cook Inlet is described as an underexplored basin, people are talking about the number of wells that have been drilled. “If you consider that there’s a whole basement to that basin that has never, for practical purposes, been tested, it’s even that much more potential for oil and gas development,” he said.

The need for gas in Southcentral is well known, but Schutt said with recent discoveries, “we may actually have found the new reserves that over time will be developed to get us healthy. We may have actually turned that page in the book.”

“What we need here, to really get healthy, is more new oil discoveries,” Schutt said. Oil is needed to feed the refinery at Nikiski, he said.

He encouraged the resource development community to work with legislators to figure out “how do we make this basin more attractive until we actually get the reserves up and we get healthier again.”

He acknowledged that CIRI has a stake in this as a major land and resource owner, but said it is something that would benefit Southcentral residents and the Kenai Peninsula Borough.

Cook Inlet Energy

Cook Inlet Energy is a young company, about to celebrate its second anniversary “of actually operating anything,” said the company’s president, JR Wilcox. He said he and the company’s CEO, David Hall, had helped run the assets for Forest Oil and then for Pacific Energy.

2009 was pretty much the nadir for the inlet, Wilcox said, with the oil price crashing, the Redoubt volcano erupting and Pacific Energy going bankrupt.

When people told him it was too bad about Pacific Energy, but he could always get another job, Wilcox said he and Hall said, “no, no; we’re forming a new company; we’re going to get some money from somewhere,” hire people back and start things up again.

“Somehow that actually happened; it still really amazes me,” he said.

Production was shut down in September, he said, and by December Cook Inlet Energy had been approved as the successor operator, hired a staff, and “within about two weeks we had some production going.” Over the next four months they got production at West McArthur River up 400 percent from where it was when the field was shut in, he said.

(See part 2 of this story, in the Dec. 4 issue, for some specifics on Cook Inlet Energy’s work to date.)

Inlet not there yet

“There’s a lot of hustle in the inlet now; it couldn’t be more different than things were in 2009,” Wilcox said. The U.S. Geological Survey report of an additional 600 million barrels of oil and several trillion cubic feet of natural gas yet to be found is positive, he said, and there are a lot of new players, “bringing a lot of new capital, new expertise and new enthusiasm.” He noted Hilcorp, Apache, NordAq, Buccaneer, Escopeta, Linc and Armstrong.

“We’re starting to really see a critical mass of players of a variety of sizes focused on a variety of different things,” Wilcox said.

But, he said, Cook Inlet oil production is off 97 percent from peak production.

“So one shouldn’t mistake green shoots for a crop here,” he said.

“If things seem great in the inlet now that’s in part just because they’ve been so crummy for so long and what we see is a lot of potential and a lot of enthusiasm.”

But, Wilcox said, there’s also been a lot of potential and a lot of enthusiasm for exploration in the Arctic National Wildlife Refuge and for a gas pipeline from the North Slope to market for about 30 years.

“Potential and reality are sometimes a long way apart from one another and it’s going to take a lot of time, money and effort to turn this potential into reality.”

What’s needed in Cook Inlet?

Wilcox warned against a perception that Cook Inlet has recovered.

“That’s not the case. … I think we may have just stopped getting worse,” he said, comparing Cook Inlet to a patient who was critical and has been stabilized. There’s going to be a “lot of effort between that condition and when they’re ready to go out and play football again,” he said.

He said several things are needed in Cook Inlet, including legislation to ensure the preservation of marginal oil and gas production. Cook Inlet Energy believes House Bill 32 does that, he said.

And there are “real problems with access.”

“I think access is almost the progressivity of the Cook Inlet: It stands between a lot of potential prospects and what could be real projects,” Wilcox said.

One access issue is a requirement for ice roads, which are expensive, can’t be built every winter and don’t give you very long to get in and work when they can be built.

Gravel is prohibited except by exception, he said, and “if you don’t have gravel roads and pads it’s really hard to have an oil field.”

There is the Kenai National Wildlife Refuge on the east side and the Susitna Flats and Trading Bay state game refuges on the west side, and there hasn’t been much road and pad infrastructure added since they were established, Wilcox said.

Road access needed

Wilcox said the 28 miles linking Mat-Su to the Beluga-Tyonek area should be “the poster child” of the roads-to-resources program.

It’s a short road across state land in a permitted right of way and has “been on the books since the late ‘60s,” he said.

A road on the west side “would immediately lower the operating cost” for projects on the west side because you could then access the area by truck.

He said it can be more expensive to work on the west side of Cook Inlet than on the North Slope because there is a road to the North Slope, but none to the west side.

Wilcox also said that platform abandonment is an issue the state needs to address.

“There’s no clear abandonment standard and … we went through this with the Osprey platform when we assumed operatorship,” Wilcox said.

He predicted that Escopeta or Buccaneer would find the lack of clear abandonment standards a hurdle if they were to try to put in new platforms.

And he had a comment on the oil production tax fight: A lot of the discussion around House Bill 110 (the governor’s tax change bill) seems premised on the main point of an energy company being to pay taxes, he said.

Taxes are not what energy companies are for, Wilcox said.

“Better than taxes are that they create jobs and they create a dynamic economy. … But even more important than the jobs is the energy security; that’s why energy companies are here, is to provide energy.”

And he called on the Legislature and the administration to continue their support for revitalizing the inlet, to turn “this nascent recovery into a truly prosperous oil and gas picture.”

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Republished with the permission of the Petroleum News