Tuesday, April 17, 2012

Marathon to exit Alaska; Selling its Cook Inlet assets to Hilcorp to focus on oil resources elsewhere

Alan Bailey
Petroleum News

Another major change in the landscape of the Alaska oil and gas industry emerged on April 9 when Marathon Oil Corp. announced that it had agreed on the sale of all of its Alaska assets to Hilcorp Alaska, the Alaska division of Houston-based Hilcorp Energy Co. Marathon is a major natural gas producer in Alaska’s Cook Inlet basin and has been operating in the state since the 1950s.

“We’ve been operating here for almost 58 years and over that time we have certainly valued all the relationships that we have throughout the state,” Wade Hutchings, Marathon’s Alaska asset team manager, told Petroleum News on the day that the sale was announced.

The Marathon sale comes on the heels of Hilcorp’s purchase of all of Chevron’s Cook Inlet oil and gas assets in 2011.

Corporate strategy

The sale reflects a Marathon corporate strategy to focus on oil rather than natural gas production, Hutchings said.

“The principal driver in our desire to sell these assets at this point is really driven by that forward strategy, which today for the company is very much focused on liquids-rich resource plays,” he said, adding that Marathon has no substantive issue with the current regulatory or fiscal situation for the Cook Inlet oil and gas industry.

“With an effective date of Jan. 1, 2012, the sale includes 17 million barrels of oil equivalent of net proved reserves across 10 fields in the Cook Inlet, as well as natural gas storage, and interests in natural gas pipeline transmission systems,” Marathon said in an April 9 press release. “In 2011 net production averaged approximately 93 million cubic feet of natural gas per day and 112 barrels of oil per day. Additionally, Marathon Oil had approximately 12.5 billion cubic feet of natural gas in storage at the end of 2011.”

The company operates gas fields in the Beaver Creek, Cannery Loop, Kasilof, Kenai, Ninilchik, North Trading Bay and Sterling units.

The Marathon pipeline assets include the Cook Inlet Gas Gathering System that runs under the Cook Inlet, the Kenai Nikiski pipeline on the Kenai Peninsula and the Beluga pipeline on the west side of the inlet. The company also owns a gas storage facility in the Kenai gas field.

The sale does not include Marathon’s Glacier No. 1 drilling rig, which the company is marketing separately. And in 2011 Marathon sold its 30 percent share of the liquefied natural gas plant at Nikiski on the Kenai Peninsula to ConocoPhillips.

Yet to close

Hutchings said that the sale to Hilcorp will likely close in the fall, given the time needed to address issues such as the need for a regulatory review of the transfer of ownership of some assets. Hilcorp will likely retain most of Marathon’s approximately 62 Alaska personnel, he said.

The financial terms of the sale have not been disclosed.

However, the acquisition of Marathon’s assets would appear to be a logical move in expanding Hilcorp’s already substantial operations in the Cook Inlet basin.

“We are excited about taking over these (Marathon) assets in the Cook Inlet,” Lori Nelson, external affairs manager for Hilcorp Alaska, told Petroleum News April 9.

Hilcorp likes to come into an area to take on aging assets that have potential for further development, Nelson said.

“Legacy assets, just like what Marathon has on the table, are certainly key for Alaska and the key for a company like Hilcorp,” she said.

John Barnes, Hilcorp Alaska’s executive vice president, used to be Marathon’s production operations manager for the Cook Inlet, leaving that position in 2007.

The sale of Marathon’s Alaska asset will make Hilcorp and ConocoPhillips the dominant gas producers in the Cook Inlet basin. ConocoPhillips operates the Beluga River and North Cook Inlet gas fields. Aurora Gas, Armstrong Cook Inlet and Buccaneer Energy also produce Cook Inlet gas.

Cook Inlet milestone

The exit of Marathon from Alaska represents something of a milestone in the state’s oil and gas history. The company’s predecessor, Ohio Oil Co., bought interests in a number of leases on the Kenai Peninsula in 1954, with its early assets including a working interest in the Swanson River oil field, discovered in 1957. The company participated in the discovery of the huge Kenai gas field in 1959 and began supplying natural gas to the Anchorage utility market in 1961.

In partnership with Unocal (now part of Chevron), Marathon discovered the Trading Bay and McArthur River oil fields offshore in Cook Inlet in 1965. In 1986 Marathon set the Steelhead platform, the largest Cook Inlet offshore platform, for the McArthur River field. And on the Kenai Peninsula the company partnered with Phillips Petroleum (now ConocoPhillips) to build the Nikiski LNG plant, which went into operation in 1969, exporting LNG to Japan.

Marathon sold most of its Cook Inlet oil production in 1996 and after that focused on natural gas exploration and development. In 2000 the company commissioned and started using its own truck-mounted drilling rig, the Glacier No. 1, for its gas-well drilling. By 2006 Marathon had brought on line new gas fields at Ninilchik, Kasilof and West Fork while also maintaining gas production in operational fields through new development drilling. The company had implemented a new well completion technology, the Excape technology, to exploit the multiple reservoir sands that typify Cook Inlet gas fields.

In March 2010 Marathon drilled its last Cook Inlet basin gas exploration well in its Sunrise prospect, in Cook Inlet Region Inc. land inside the Kenai National Wildlife Refuge in the northern Kenai Peninsula. The company has not released the results of that drilling, other than saying that it “encountered a zone of interest.”

In 2006 Marathon commissioned its Kenai gas storage facility in support of its contractual obligations for the supply of utility gas during the winter.