Friday, May 31, 2013

AIDEA gets energy; Some 4 years after strategic planning process, gains importance in O&G sector

Eric Lidji
For Petroleum News

One of the most ambitious players in the Alaska oil and gas sector is not a producer, or a pipeline company, or even an oil field services company. It’s a public corporation.

After decades with limited involvement in the largest private industry in the state, the Alaska Industrial Development and Export Authority is currently involved in drilling, infrastructure and distribution projects on the North Slope, Cook Inlet and the Interior.

Just five years ago, AIDEA was involved in only a handful of energy projects, including the Snettisham Hydroelectric Dam and the Healy Clean Coal Project. But a strategic plan in 2008 and 2009 kicked off a new era for the public corporation, which the Alaska Legislature created in 1967 to promote economic development in the still-young state.

When the state created AIDEA, it charged the public corporation with assisting a broad range of commercial projects, starting with any facility used for “making, processing, preparing, transporting, or producing in any manner, goods, products, or substances of any kind or nature or in connection with developing or utilizing a natural resource.”

“We had been looking at ways we could assist more in developing resource development,” AIDEA Executive Director Ted Leonard told Petroleum News on May 20. “If you go back to our definitions of facilities, these types of facilities are pretty much number one on the project definition list that we have in our statute. So we’ve been looking at how to do more resource development investment and what tools we needed.”

The strategic plan has prompted AIDEA to seek out new opportunities in recent years — both economic and legislative. Over the past few legislative sessions, AIDEA has successfully lobbied for several changes to its statutes, and it has used its increased authority to become involved in projects previously outside its reach. Those projects include the Endeavour-Spirit of Independence jack-up rig now drilling in Cook Inlet, a collection of infrastructure projects for the Mustang oil field on the North Slope and potentially financing a liquefied natural gas trucking operation for the Interior.

On the surface it may seem as though AIDEA is simply adding energy projects to a portfolio previously focused on retail, tourism and real estate, but the new strategy is actually more concerned with how AIDEA gets involved in projects. Those changes could make AIDEA a key player in the Alaska oil and gas sector in the next decade.

The decline of the majors

The AIDEA board of directors initiated the strategic plan in late 2008.

The decision came at a moment of reflection and transition for AIDEA. The public corporation had recently turned 40 and had hired Leonard as its new executive director.

“They were looking at how AIDEA could be more effective and efficient in their investment and how we could in essence get more bang for the buck,” Leonard said.

The planning team found that AIDEA enjoyed a good reputation among its traditional stakeholders, but was considered “reactive or passive” by some economic players.

To become a more active player in the economy, the strategic plan suggested that AIDEA diversify its assets, acquire new financing tools and promote itself to additional sectors.

AIDEA began implementing this plan at an unusual time for Alaska oil and gas.

Some 50 years after the discovery of the Swanson River field launched the local industry, a handful of major companies were competently overseeing declining legacy fields on both the North Slope and in Cook Inlet, but showed limited interest in exploration.

While the majors harvested those giant fields, several new players began pursing midsize fields that the majors had overlooked for decades.

Anadarko Petroleum Corp. launched a natural gas exploration program in the Brooks Range foothills in late 2007, Eni Petroleum sanctioned the Nikaitchuq unit in February 2008 and Pioneer Natural Resources brought the Oooguruk unit online in June 2008.

The rise of the indies

This transition left many holes in the sector, though.

In Cook Inlet, declining natural gas production was causing a ripple effect.

Agrium closed its fertilizer plant for lack of supplies. The Regulatory Commission of Alaska, the utilities and the producers were fiercely debating the best way to meet local demand in the near term. The exploration climate was so poor that the State of Alaska made its support for continued LNG exports contingent on the producers drilling new wells. Even with the support, the companies later announced plans to close the facility.

And on the North Slope, smaller independents were facing challenges as they pursued midsize fields that would have had investors drooling in any other state in the country.

These smaller players included the Alaska Venture Capital Group, Armstrong Resources, Savant Alaska and UltraStar Exploration. Unlike the majors or even the bigger independents, those companies would have been hard pressed to internally fund Arctic exploration and development operations during good years, let alone in the middle of a economic recession. As Alaska Venture Capital Group Managing Director Ken Thompson told Petroleum News in October 2008, “In this kind of climate, cash is king.”

In other words, the oil and gas sector provided an opportunity for AIDEA to diversify its assets by proactively promoting itself to a growing segment within the Alaska economy.

In a state where government and the economy revolve around the oil industry, it might initially seem odd that a public corporation devoted to economic development would take four decades to make a big move into the sector, but AIDEA’s Deputy Director of Project Development and Asset Management James Hemsath called it a matter of timing.

The state created AIDEA a year before the discovery of Prudhoe Bay, and designed it to be useful to range of sectors. “Once Prudhoe Bay hit and there was that very large development, there really wasn’t a place or structure for the smaller, entrepreneurial-like oil firms that are coming into play,” he said. With production declining at legacy fields, new opportunities are emerging. “Ten years ago there wasn’t the need that there is now.”

A place for AIDEA

AIDEA began seeking the authority allowing it to invest in new ways.

In early 2011, Gov. Sean Parnell signed House Bill 119.

The law gave AIDEA the ability to invest in a corporation or a limited liability company that held a development project as its sole asset. In other words, AIDEA and a potential partner could form a joint venture for a specific project by creating a new company.

“That has been, I think, a godsend, just in terms of organizational efficiency,” Hemsath said, pointing to the flexibility it gives AIDEA when working with numerous partners.

Also in early 2011, the Alaska Legislature created the Sustainable Energy Transmission and Supply fund for downstream projects. The SETS fund allows AIDEA to “issue direct loans for up to one-third of the capital cost of an energy project, or create a secondary market through loan guarantees that partner with local Alaskan banks for financing.”

This year, the Legislature approved its first use of the fund. Senate Bill 23 allowed AIDEA to invest in a proposed LNG trucking system between the North Slope and the Interior, a system that would include a major build out of the existing distribution grid.

Far more importantly, at least for the long-term, SB 23 also gave AIDEA the ability to directly finance larger infrastructure projects that it does not intend to own or operate.

For large-scale energy projects like Snettisham and Healy Clean Coal, AIDEA was required to own the project outright. This requirement limited the number of projects AIDEA could fund at any given time, and left all the risk for these projects with AIDEA.

The strategic plan suggested finding alternative ways to invest in large projects.

Between HB 119 and SB 23, AIDEA can now provide what it calls “mezzanine financing,” or financing designed to fill gaps between existing debt and equity on a company’s balance sheet. In practice, these low-interest loans can bring down the cost of financing for small independents by providing better terms than would be available on the private market, and they can also make once-hesitant financers willing to invest.

Before, AIDEA needed to find projects it could own outright. Now, Leonard said, “We’re looking at being able to leverage our investments with more private investment. That was one of the things that was key as we looked at our strategic plan in 2009 and 2010.”


Coincidentally, AIDEA launched this new strategy as the State of Alaska began implementing the credit program in the Alaska’s Clear and Equitable Share oil tax. The combination of AIDEA and ACES is creating a situation where independents can get public funds twice in the early life of a project: once from AIDEA to help finance exploration work and later from ACES in the form of exploration credits for the work.

The state never explicitly intended for these programs to work in tandem. “As it turned out, that’s what happened,” Hemsath said, “because the ACES credits became collateral for some of the companies to use with getting their financing to do the operations.”

After cashing in their ACES credits, companies have come to AIDEA for mezzanine financing “that was enough to get better business than their own cash flow,” he said.

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Tuesday, May 21, 2013

Senator Murkowski Opening Statement to Natural Gas Roundtable

America is enjoying a natural gas boom, but we cannot afford to drag our feet on natural gas - both for our own use and for exports.

Monday, May 20, 2013

A mother’s love and SB 21

Deborah Brollini
Alaska Energy Dudes and Divas

There are not many kids out there who have a mother who will take on governors, legislators or an Alaska Supreme Court justice.

My children have that mom, and they certainly did not sign up for an out spoken mother who will move mountains for them. But, it is what is, and I’m unapologetic in fighting for my children’s future, and my beloved state of Alaska.

This is my home, where I grew up, and all of Alaska’s youth deserve the same opportunities my friends and I experienced growing up regardless of circumstance. It is our responsibility to leave Alaska better than we found it, and to give our young people hope.

I attended South Anchorage High School’s graduation last week because my daughter was a junior honor marshall. The last time I attended a graduation at the Sullivan Arena I was graduating from college.

The excitement and anticipation in the arena was incredible as I watched parents, siblings, grandparents and graduate’s friends enter the arena.

I was overwhelmed with emotion when the pomp and circumstance march played and the river of tears poured over my face.  I stopped crying when I realized that these graduates were just entering high school when I began my fight for their futures. I went from being emotional to being a proud mom to every graduate who walked over the stage and I rejoiced in their futures because I was in the trenches fighting for it.

My daughter bought me tickets to the Phillip Phillips concert for mothers day. Little does she know it was his song “home”  that kept me fighting for her and her brother’s futures this past legislative session.

Friday, May 17, 2013

Work on the ground well under way on Exxon’s long-awaited Alaska project

Wesley Loy
For Petroleum News

ExxonMobil is starting to make real strides on its Point Thomson development on Alaska’s North Slope.

Construction contractors for the oil giant have been focusing on two project components — the central pad, and the pipeline that will tie the field into the existing North Slope oil transportation network to the west.

ExxonMobil is aiming to begin production of natural gas condensate, a light hydrocarbon liquid, by May of 2016.

The initial production level is expected to be 10,000 barrels a day, a small volume in the context of overall North Slope oil production, which currently exceeds 550,000 barrels daily.

But the project is regarded as a key first step toward a potential multibillion-dollar effort to fully exploit one of North America’s largest undeveloped oil and gas fields.

ExxonMobil has two major partners in the field, BP and ConocoPhillips.

The Australian firm WorleyParsons, along with Fluor, is providing overall project management.

Central pad camp set up

Kim Jordan, an ExxonMobil spokeswoman in Houston, told Petroleum News on May 15 that modules for a permanent work camp were placed on their foundations at Point Thomson’s central pad in April.

The work camp was built at a fabrication yard in the Anchorage area, she said.

More infrastructure development is planned for the summer, including the commissioning of the camp, completion and certification of an airstrip, and installation of a permanent service pier, Jordan said.

The field hugs the shore of the Beaufort Sea, about 60 miles east of Prudhoe Bay and just west of the Arctic National Wildlife Refuge.

The project design calls for three drill pads, with the central pad to host the process and compression equipment needed to produce the gas condensate. These heavy industrial modules are not yet on the North Slope as ExxonMobil focuses for now on basic site preparation.

Two wells have been drilled on the pad already, and are in suspended status.

ExxonMobil will produce the condensate through a process known as cycling, where natural gas is brought to the surface for collection of the liquids. The dry gas will then be shot back underground for storage. The project is expected to cycle 200 million cubic feet of gas per day.

It’s a challenging project, for a number of reasons.

The Point Thomson site is remote, and materials and equipment must be brought in by coastal barge or by ice road. ExxonMobil this year built an ice road from the west that was open from February until late April.

With respect to production, ExxonMobil will have to contend with very high pressures in the Point Thomson reservoir. The company says 10,000 pounds per square inch of compression will be required to reinject the gas.

The export pipeline

A vital component of the Point Thomson project is the new 22-mile export pipeline that will carry the liquids production west to Badami, a former BP unit now operated by Savant Alaska. From there, the liquids will move through the Badami pipeline and ultimately end up in the trans-Alaska oil pipeline. The Point Thomson pipeline will run along the coast to Badami. Like many pipelines in the North Slope oil fields, the Point Thomson line will be above ground and insulated, and will rest on brackets known as “vertical support members,” or VSMs.

Graham Smith, spokesman for the State Pipeline Coordinator’s Office, said lease compliance specialists made three trips to the Slope to check on the pipeline work, which just wrapped up for the season.

“Definitely making some serious progress,” Smith said. “All the VSMs are hammered in.”

The next step will be to lay the actual pipe, and that should occur next winter, he said.

The straight pipe already is in Alaska, stockpiled in Fairbanks, Smith said. The bends have yet to be delivered.

Jordan, the ExxonMobil spokeswoman, said workers installed about 2,200 VSMs. She confirmed that the export pipeline and gathering line will be installed next winter.

The 12-inch export pipeline will feature a design capacity of 70,000 barrels per day, well above the 10,000 barrels per day of condensate ExxonMobil expects to produce initially. The surplus capacity will accommodate fuller Point Thomson development, and maybe production from other eastern North Slope developments.

The budget for the pipeline alone is $253 million, ExxonMobil has said.

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Sunday, May 5, 2013

A fantastic video story of oil exploration and discovery

In the past, prospectors used to drill anywhere they imagined oil might be hidden.

Today’s geoscientists can pinpoint where to drill on a basin hundreds of kilometres wide with much greater chance of success.

This is the story of the exploration teams at Tullow Oil: The story of how the geologists, engineers and economists start with a blank sheet of paper… gather evidence for their ideas… and evaluate the size of the prize.

Saturday, May 4, 2013

NordAq says if testing goes OK production could begin this fall

—Kristen Nelson

NordAq Energy has submitted an amended plan of operations for its Tiger Eye Central project, and has told the Alaska Division of Oil and Gas that pending the successful outcome of its exploration program, it may install production facilities. Natural gas production could begin in October from the prospect, southwest of the Trading Bay Production facility on the west side of Cook Inlet, NordAq said in its project schedule.

NordAq, an Anchorage-based independent, has four Cook Inlet basin prospects and a block of tracts in Smith Bay off Alaska’s North Slope.

The company made a gas discovery in 2011 at Shadura, a prospect on Cook Inlet Region Inc. subsurface in the Kenai National Wildlife Refuge northeast of Nikiski on the east side of Cook Inlet.

Changes in the amended plan of operations for Tiger Eye Central are on private surface estate accessing private and state subsurface resources and include expansion of the existing TEC-1 pad to accommodate a 60-man camp and natural gas production facilities; construction of the TEC-2 pad; extending the TEC-1 access road from the TEC-1 pad to the TEC-2 pad; and exploration drilling activities.

The company built the TEC-1 pad last year and the current project schedule includes obtaining permits for expanding the pad, for construction of the TEC-2 pad and an access road from TEC-1 to TEC-2.

NordAq will also be testing the Tiger Eye Central No. 1 well drilled last year.

There will be drilling operations on the TEC-1 pad from May through July, along with construction of the TEC-2 pad and access road and summer field studies. In August and September construction equipment, fuel and supplies would be mobilized from the east side of Cook Inlet and production facilities would be constructed.

First production from Tiger Eye Central wells would be in October.

The comment period on the amended plan closes May 30.

Eight wells planned

NordAq drilled the Tiger Eye Central No. 1 well on the TEC-1 well pad last year and will do well testing this spring. The company said that based on testing results it proposes to expand the pad 200 feet to the east and construct the TEC-2 pad and access road.

“Up to eight wells will be drilled from TEC-1 before the pad expansion occurs,” the company said.

All facilities, including the TEC-1 well pad and the proposed TEC-2 pad, the access road constructed last year are on surface lands owned by Salamatof Native Corp.

The company said it has and will continue to use existing facilities on the west side of the inlet whenever possible during exploration and development, including barge landings, employee camp housing, staging areas, gravel material sites, gravel lease roads, gravel pads, airstrips, waste disposal facilities and water supplies.


If sufficient gas is proven from wells on the TEC-1 pad NordAq said it would construct an 8-inch pipeline to transport natural gas to existing infrastructure at West McArthur or the Trading Bay Production Facility. The pipeline right of way is on Salamatof Native Corp. surface. NordAq said wells will encounter Cook Inlet Region Inc. and state subsurface; wells from the TEC-1 and TEC-2 pads target natural gas at an approximate total measured depth of 4,000 feet.

A mobile rotary drill rig will be used to drill the natural gas wells with approximately 30 days anticipated for drilling and testing each well.

Existing drilling fluid disposal facilities operated by Cook Inlet Energy at the West McArthur Facility and Hilcorp at the Trading Bay Production Facility will be used to dispose of drilling wastes.

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Looking at the options; Southcentral utilities review evolving Cook Inlet gas supply situation

Alan Bailey
Petroleum News

With some Southcentral Alaska utility executives presumably sighing with relief as the weather warms after a winter that saw no shortfalls in Cook Inlet utility gas supplies, utility staff are busy planning for the next winter, as well as evaluating how to keep adequate gas flowing in years to come. The utilities have been facing something of a fuel supply crisis as gas production from aging Cook Inlet gas fields declines.

During a meeting of the Anchorage Mayor’s Energy Task Force on May 1, the utilities explained some of their plans, hinting at some progress in dealing with short-term gas supply needs while also explaining some of the gas supply challenges.

In terms of progress, there was mention of discussions between the utilities and Hilcorp Alaska, the company that has now completed its takeover of Cook Inlet oil and gas fields previously owned by Chevron and Marathon Oil Co. Hilcorp has embarked on an aggressive program of field development, with expectations of boosting Cook Inlet gas production. The utilities have yet to announce any new gas supply contracts with Hilcorp, but during the Energy Task Force meeting there was mention of the possibility that adequate Cook Inlet gas supplies can now be maintained through to 2018 — the utilities have previous projected shortfalls in gas deliverability, the rate at which gas can be delivered, as early as the winter of 2014-15.


During the past winter the new Kenai Peninsula gas storage facility operated by Cook Inlet Natural Gas Storage Alaska, or CINGSA, played a vital role, filling what would otherwise have been gas deliverability gaps during cold weather, especially in December. The CINGSA facility first went into operation in April 2012, injecting excess summer gas into its underground reservoir for winter use.

John Lau, director of engineering for Enstar Natural Gas Co., Southcentral’s main gas utility, told the Energy Task Force that, overall, the winter had been less cold than had been allowed for in the storage facility’s design. But, because of some difficulties with the purchase of pad gas, the gas permanently stored in the facility to maintain reservoir pressure, the facility did not acquire its full quota of pad gas until February or March of this year, Lau said. Those pad-gas purchase issues have now been resolved, he said.

Lau said that the storage facility’s current gas capacity of 11 billion cubic feet compares with a total annual demand of around 80 billion cubic feet for Cook Inlet gas. And, with production wells at the facility able to deliver gas faster than typical gas field wells, the facility can supply gas at a rate of around 150 million cubic feet per day early in the winter season. That rate declines to about 110 million cubic feet per day later in the season, as the pressure drops in the storage reservoir. Those supply rates can amount to about 30 percent of gas demand on a particular winter day, he said.

It would be possible to expand the facility’s capacity to 18 billion cubic feet by drilling additional wells. But the cost of such an expansion would need to be justified by a demand for additional gas storage, Lau said.

Transmission ring

CINGSA is plugged into the Southcentral gas pipeline network at a location to the south of the city of Kenai, at the southwestern perimeter of a ring of gas transmission pipelines that connects gas fields on the west and east sides of Cook Inlet with major population centers in Anchorage and the Matanuska-Susitna Valley.

On the southeast side of the ring two transmission lines carry gas from the east side of Cook Inlet through the northern Kenai Peninsula, under Turnagain Arm and into Anchorage. These lines, with a current carrying capacity of around 230 million cubic feet per day, funnel the bulk of Anchorage’s gas supply into the city. Enstar plans to increase the capacities of these lines to around 250 million cubic feet per day in the next year or two, an upgrade driven to a significant extent by the location of the CINGSA facility near Kenai, Lau said.

Need gas from west

But during cold winter weather the maximum throughput of the lines through the northern Kenai Peninsula is insufficient to meet all of Anchorage’s gas demand. Consequently, some gas has to move clockwise around the gas transmission ring, with gas flowing north from the west side of Cook Inlet through an Enstar 20-inch-diameter transmission line that connects to the Matanuska-Susitna valley communities and hence to Anchorage. This line was installed in 1984 to bring gas from the Beluga River and Trading Bay fields to market, Lau said. But, with gas production on the west side of the inlet in decline, Enstar’s transmission line on the west side is now substantially under used, he said.


Completing the gas transmission ring by connecting the west side and east side pipelines is the Cook Inlet Gas Gathering System, or CIGGS, a pair of high-pressure transmission lines that runs under the Cook Inlet north of Kenai. The system was built in the early days of the Cook Inlet gas industry to move gas east from Trading Bay on the west side of the inlet to a fertilizer plant at Nikiski on the Kenai Peninsula. But in 2011, with funding assistance from the state, a new gas compressor was installed on the Kenai Peninsula to enable gas to flow east to west through CIGGS, rather than just west to east as previously. The prime purpose of the upgrade was to ensure adequate gas supplies for Chugach Electric Association’s gas-fired power station on the west side of the inlet. But with the new compressor only able to push 50 million to 60 million cubic feet per day east to west through CIGGS, limitations on east-to-west flow through the system have created a bottleneck in flowing gas clockwise around the gas transmission ring, thus continuing the significant under use of Enstar’s 20-inch line on the west side of the inlet, Lau explained. An upgrade of the CIGGS east-to-west compression capabilities, costing perhaps costing $10 million to $15 million, could increase the east-to-west capacity to, say, 200 million cubic feet per day, he said. And although Hilcorp, the owner of CIGGS would obviously have to be able to recover the cost of any upgrade, an upgrade of this type would likely be more cost effective in shipping additional gas north than continuing to try to increase pipeline capacity through the northern Kenai Peninsula, he said.

No redundancy

Increased capacity on CIGGS would also alleviate major concerns among the utilities about the lack of redundancy in the current transmission system for delivering gas to Anchorage. The two submarine pipeline systems — CIGGS and the lines under Turnagain Arm — while apparently in good condition, are both old. Currently, a failure of either of these pipelines would cause major problems for gas supplies to Anchorage, Lau commented. Enstar is currently in discussion with Hilcorp, figuring out the best locations in the pipeline network for future gas compression, he said.

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