Friday, May 11, 2012

Oil, gas from old assets; Independent Hilcorp reworking Cook Inlet wells, fields, formerly held by Chevron

Kristen Nelson
Petroleum News

Hilcorp Alaska is focused on finding and producing more oil and natural gas from legacy Cook Inlet assets. It acquired Chevron’s Cook Inlet assets last year and is in the process of acquiring Marathon Oil’s inlet assets.

Producing from old wells and fields is the company’s strength, John Barnes, Hilcorp’s senior vice president for Alaska, told the Regulatory Commission of Alaska May 9 and the Alaska Support Industry Alliance May 10; this story combines comments from both presentations. Barnes said there are lots of opportunities in Cook Inlet, and Hilcorp is a fast-moving independent with enough financial clout to do the work that needs to be done.

Among the challenges Hilcorp is working on, he said, are predictable permitting timelines — with predictability the real issue, not how long it takes.

“If it takes a year, you’d better have an inventory that lets you plan out a year ahead of time; if it’s a week, that’s great,” Barnes said.

He said the biggest obstacle he sees is caused by the decline of the service industry in the inlet.

Hilcorp “can’t move fast enough because we have to get the service industry moving with us.”

The problem is that the service industry needs to know its crews will be working day in and day out on “continuous drilling programs,” which will allow both the service industry and Hilcorp to be more efficient.

Urgency is one of Hilcorp’s core values, Barnes said, noting he’d recently told his managers that if their plates were full now, they’d better get platters, because things would get busier.

The same would apply to the service industry, he said.

Increasing production the goal

Houston-based Hilcorp Energy Co. is the “third largest privately held oil and gas producer in the United States,” giving it the financial strength to do the work that needs doing on the Chevron Cook Inlet assets it acquired last year and on the Marathon Cook Inlet assets it is in the process of acquiring, Barnes said.
The focus is not on new drilling: In all its operations Hilcorp drilled 60 new wells last year; but it did 1,500 workovers.

“That’s the hard work to get production going,” he said.

He told RCA commissioners clearly concerned about declining Cook Inlet natural gas production that Hilcorp’s production in the Lower 48 has gone up year after year.

“And it goes up because of hard work and capital being spent in existing legacy assets. That’s one opportunity that exists in the inlet; that’s one that we are choosing to pursue primarily.

“I can’t probably overemphasize the amount of work that’s actually required to try to take the risk and spend money and try to improve recovery from these fields,” Barnes told the commissioners.

Offshore drilling

Hilcorp has a “derricks’ down” project under way, with derricks being taken off three platforms in the Trading Bay unit and from the Granite Point platform.
Those derricks were old technology, he told the Alliance audience.

“One way or another we’re going to get a modern drilling rig here,” whether Hilcorp builds it or someone else builds it. It’s similar to the model Marathon used, he said, where you get a rig with modern technology and just knock out wells; Hilcorp will do the same thing with a workover unit, he said.

The company will also be drilling onshore.

Barnes told the Alliance it’s embarrassing, but the company is excited about just running a workover rig in the Swanson River field. “That’s how low the bar is,” he said.

Drift River

Barnes said Hilcorp has a C-plan, an oil discharge prevention and contingency plan renewal, out for public comment which references work at the Drift River Terminal. The company plans to raise the berms protecting the tanks this summer and install some new ones, with a goal of storing oil at Drift River again.
Storage of oil stopped at Drift River due to activity at the Mount Redoubt volcano, but the berms around the tanks did what they were supposed to do and protected the tanks, Barnes said.

Hilcorp is working closely with the Department of Environmental Conservation on the C-plan, he said.

“It’s very important to try to get that terminal open again so that you’re allowed to manage your tanker traffic more effectively in the inlet,” Barnes said. Right now oil has to be stored at production facilities where there is a finite amount of storage “and it can result in tankers being curtailed, production shut-in, when you run out of storage.”

It’s not the way Hilcorp wants to manage oil storage, he said.

In response to a question about an alternative for storage at Drift River, Barnes told the Alliance audience that there has been discussion about a subsea pipeline, but sizing it would be a problem.

Because Hilcorp intends to grow production, “I don’t know how to size it yet,” Barnes said.

It’s the Goldilocks’ problem, he said: You don’t want it too small and you don’t want it too large.

A subsea pipeline may be a consideration for the future, but Barnes said Hilcorp needs to “establish a track record of getting production up” so that it could better determine a pipe size for such a project.

Gas production down

Barnes showed the commission recent Cook Inlet natural gas production figures. From 2008 to 2011 production declined from more than 400 million cubic feet per day to just over 300 million last year, he said.
“That represents about a 23 percent decline and I think we’re all aware that most majors have significantly slowed their spend in the Cook Inlet and that is not surprising because of this decline.”

But others are coming into the inlet, he said, calling it “an opportunity for companies to come in and try to perform and make a business.”

Different companies play to different strengths, Barnes said, mentioning Apache’s large lease position and extensive exploration program.

“Hilcorp’s strength is we acquire old assets,” he said.

About half shut-in

The Marathon assets Hilcorp is acquiring include 157 wells, 75 producing and 74 shut-in.
“Hilcorp looks at those shut-in wells as assets,” Barnes said. “We’re very much about trying to stare into every well, every wellbore and look at every sand and maximize production from the assets that we’re acquiring.”

Marathon is exiting the Cook Inlet basin, and that was important for Hilcorp in the acquisition, Barnes said, because, “It’s a chance for us to consolidate interests in legacy fields, which we believe present tremendous opportunities for additional work and additional development.”

Barnes noted that McArthur River and Ninilchik represent about 50 percent of Marathon’s production, and those are both fields in which Hilcorp already has an interest. Consolidation of ownership in fields which are late in life allows for commercial alignment which may not exist with multiple owners, he said.

Barnes said Hilcorp’s long-range plan is “pretty simple: It’s all hard work.”

“You want to invest significant amounts of capital to exploit the assets that we will be acquiring and in in-fill drilling, recompletions and workovers and compression.”

As for what Hilcorp will be doing in Cook Inlet, Barnes said, “We are not a company that will be performing lots of big projects: We make our living through lots of small projects and ... working every wellbore, every sand and seeing what’s there.”

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