Having completed the purchase of Marathon’s Cook Inlet assets at the beginning of February, Hilcorp is in the process of figuring out new gas supply arrangements with Southcentral Alaska utilities, with gas supplies in 2013 being the immediate concern, Hilcorp Energy President Greg Lalicker told the Alaska House Resources Committee “lunch and learn” meeting Feb. 26.
“We’ve gone out to ask all the domestic gas consumers what they need for gas and we’ve responded back to that already,” Lalicker said. “We should get those signed here fairly quickly, over the next two, three, four weeks.”
Hilcorp is also working on gas reserves certification for its new acquisitions, to be able to commit to gas supply contracts beyond 2013.
“I think over the next two to three months we’ll be contracting for the 2014, 2015, 2016 timeframe,” Lalicker said.
Marathon was primarily a gas producer in the Cook Inlet basin and the Marathon assets that Hilcorp has purchased include large gas fields such as the Kenai and Ninilchik fields. And, by reactivating some old gas wells, Hilcorp has already pushed up gas production from the old Marathon assets, Lalicker said.
Hilcorp’s immediate problem is that, with the gas production rate up a bit, the company has more gas than it needs to meet the immediate demand, he said.
In 2013 Hilcorp expects to deliver some 67 billion cubic feet of a total Cook Inlet gas demand that hovers around 92 to 94 bcf, with other gas producers in the basin needing to meet the balance of that demand, Lalicker said. Hilcorp also has the resources to cover that 67 bcf of demand for the next five years, he said. And, with total Cook Inlet gas production well below its peak of a few years ago, much of the region’s gas pipeline infrastructure has excess capacity to carry currently produced gas, he commented.
Not like the past
But Lalicker cautioned against expectations that somehow the Cook Inlet basin would return to a situation seen many years ago, with huge gas fields delivering an overabundance of gas.
“The gas business will never look like it did when the Cook Inlet was a new basin,” Lalicker said.
In fact, Hilcorp’s mode of operation is to seek small incremental production improvements in existing fields, adjusting its production to market conditions, rather than go seek big, undiscovered oil and gas pools for future development.
“We’re never going to go out there and say ‘let’s start drilling wells right now to produce gas five years from now or 10 years from now,” Lalicker said. “That’s just a waste of capital. We’re going to be proving up reserves just sitting out there waiting to be produced.”
And rather than depending on one big development project, Hilcorp’s approach is to carry out many small projects, each project adding a little to production, but with the projects in total making a big difference in pushing up production and extending field life.
“As fields get old, they’re not dead. It just takes a kind of different mental approach, where you want to keep driving rate and reserves up,” Lalicker said. “That’s what we specialize in doing as a company: lots of little things.”
And, by using this approach, Lalicker said that he sees the possibility of anywhere from 15 to 25 years of life left in the existing Cook Inlet oil and gas fields.
As an example of Hilcorp’s “a bit at a time” approach to breathing new life into old assets, Lalicker described his company’s endeavors in the Swanson River field in the northern Kenai Peninsula, the first major oil field to start production in Alaska.
When Hilcorp took over that field from Chevron in early 2012 the field was producing 250 to 475 barrels of oil per day, Lalicker said. During 2012 Hilcorp sidetracked three wells and repaired eight wells, with field production climbing to 2,000 barrels per day by January 2013.
“This year we’re going to drill seven more wells and we have about 15 workover, recompletion projects,” Lalicker said. “It’s not inconceivable that you’ll see the rate climb another 2,000 to 3,000 barrels per day, by the time we’re all said and done.”
Lalicker said that Hilcorp plans to spend $300 million to $350 million on its Alaska assets in 2013, continuing the improvements in production that it has so far achieved in its Cook Inlet oil fields as well as taking the same incremental approach to boosting output from the gas fields it has acquired from Marathon.
“We are very optimistic from the acquisition of Marathon (assets) that over time we’ll be able to prove out more reserves and add more rate to those fields, just as we have from the other ones,” Lalicker said.
Lack of services
Lalicker commented that his biggest surprise since Hilcorp entered the Cook Inlet oil and gas industry has been the extent to which the oil and gas service sector in the region had declined, as activity in the basin has dropped over the past 10 years. In fact, the company had been unable to start ratcheting up oil production from its properties during the first six months of 2012 because of a lack of support services, he said.
As part of its Cook Inlet operations, Hilcorp is rebuilding that oil services base, Lalicker said.
There is also a lack of modern equipment, such as easy-to-move, high-spec drilling equipment — a whole new generation of rigs has emerged over the last 10 years, he said. Hilcorp has contracted two land-based drilling rigs to come up from the Lower 48 to work on the company’s Cook Inlet properties, and the company is also bringing up two specialized, purpose-built workover rigs for repairing offshore wells, Lalicker said.
North Slope gas?
Asked if he is concerned about possible future competition from North Slope gas if a gas line from the North Slope is built, Lalicker responded that he is in the Cook Inlet to make money.
“If someone else can produce gas in the Cook Inlet cheaper than what I can — I don’t care if it comes from the North Slope, I don’t care if it comes from imports, I don’t care if it comes from another discovery within the Cook Inlet — if they can put me out of business, I’m out of business. I just go and ply my trade somewhere else. … I shouldn’t be producing an inefficient resource at the expense of a more efficient source,” Lalicker said.
And, regardless of the gas situation, Hilcorp has plenty of oil opportunities in the Cook Inlet basin, he added.
And the tax situation for a Cook Inlet producer?
While the tax arrangements for the Cook Inlet have appeared to Hilcorp to be adequate, the company sees the quality of the field reservoirs as the most important factor in attracting it to the basin, Lalicker said. But, from a tax perspective, tax stability is crucial, he said.
“The main thing I need, care about and worry about is predictability,” Lalicker said. “What I can’t put up with is the notion that two, three, four years down the road the deal’s going to change, because then I’m going to stop investing because I can’t predict what’s going to happen.”
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