Friday, June 7, 2013

No LNG needed? Hilcorp says there’s gas in Cook Inlet, will develop it to meet contracts

Kristen Nelson
Petroleum News

Does Southcentral Alaska need to import liquefied natural gas?

That’s been a growing concern in recent years as production of Cook Inlet natural gas declined.

But Hilcorp Alaska — now the region’s major oil and gas producer — says the gas resource exists to meet expected demands.

Hilcorp assumed a dominant role in crude oil production in Southcentral when it acquired Chevron’s Cook Inlet assets at the beginning of 2012 and since closing on acquisition of Marathon’s Cook Inlet assets early this year it has also become the dominant producer of natural gas.

The company’s crude oil production helps feed the Tesoro refinery in Nikiski, and can be supplemented by North Slope and imported crude oil. But natural gas, used for both heating and electric power, cannot be easily supplemented because Southcentral Alaska is not connected to any outside sources of gas.

With declining gas production and the possibility of pipeline gas from the North Slope a long way off, concerns about deliverability of Cook Inlet natural gas have grown.

Contracts through 2017

But Hilcorp officials say that based on gas which is either available or available to develop they are in discussions with customers for contracts to meet local needs through 2017.

John Barnes, Hilcorp Alaska’s vice president for exploration and production and Kurt Gibson, vice president of the company’s Alaska midstream division, told Anchorage Mayor Dan Sullivan’s Energy Task Force at a June 5 meeting that Hilcorp is working with customers to identify natural gas needs, develop contracts to meet those needs, produce that gas as needed and get out in front of the issue by identifying further reserves in the area.

The company has been touting its increased oil production, and Barnes shows a graphic illustrating a 36 percent increase at Hilcorp-operated fields from January 2012 through May of this year — with the largest increase at Swanson River, 412 percent, followed by Trading Bay at 157 percent.

Natural gas production saw a dramatic spike beginning in February after the Marathon acquisition closed.

Hilcorp doesn’t operate the Beluga River field, which it is a one-third owner, and decline there continued.

But at fields which Hilcorp now operates the uptick was dramatic.

Barnes said after they closed on the Marathon acquisition they took advantage of the remaining winter window to turn the wells all the way up and see what they could do. Hilcorp’s presentation showed production up from some 65 million cubic feet per day at the end of January to almost 180 million cubic feet per day in February.

At Deep Creek, where production had already increased 96 percent prior to the Marathon acquisition, Barnes said the field was “making more now than it was shortly after Unocal discovered and developed it.”

While Hilcorp hasn’t yet had as much of a chance to drive performance on the gas fields as it would like, the gas asset is there and the strategy is to drive production, getting both rate and cash flow up, Barnes said.

Illustrating the potential, Barnes said Hilcorp has done a 3-D seismic program at the Deep Creek unit and estimates that the resource at Happy Valley within that unit is “probably three to four times larger than the current participating area.”

Moving fast

Urgency is one of Hilcorp’s core principles, Barnes said, and they’re trying to move fast following the Marathon closing. Two onshore drilling rigs started loading out this week, he said, and two fit-for-purpose pulling units will arrive for the offshore platforms this summer.

Hilcorp has already been able to go back onto the Trading Bay unit platforms and reactivate gas production there, he said.

The company spent $238 million in Alaska last year, Barnes said: 2 percent “getting rid of old junk,” 38 percent “fixing broken stuff,” 8 percent on non-operated projects and 52 percent “executing new projects.”

The 2013 spend is $300 million, and while Barnes said he wouldn’t break out how that would be spent, he expects some 70 percent will be on new projects.

Hilcorp will be addressing costs, Barnes said, and will be going from gas lift to electric submersible pumps on all the platforms. It will cost money, but in the long run Hilcorp will produce more oil at a lower cost, he said.

Gas marketing local

Gibson, head of the company’s new Alaska Midstream Division, said oil marketing was handled out of Houston but gas marketing is being handled out of Anchorage.

With “boots on the ground,” he said, Hilcorp has reached out to the customer community in Alaska and invited them in to hear the company’s plans in Cook Inlet, its timing and how Hilcorp might be able to provide for their gas needs.

Gibson said Hilcorp has a business to run and has to plan that business in a way that makes sense as far as capital allocation is concerned.

He said that requires candid conversations with folks that burn gas, with customers telling Hilcorp what they need and Hilcorp telling customers whether it can meet those needs. Gibson said the discussion has been productive.

But Hilcorp doesn’t plan to go back to the way things were in Cook Inlet when there was an abundance of natural gas found while looking for oil, which produced numbers like 20 to 1 reserves to production ratios, held prices down and required industrial facilities like the LNG export plant and the fertilizer plant.

“The world has changed such that we’re going to have a just-in-time inventory world for natural gas,” Gibson said.

Hilcorp thinks it can “meet the needs of the local community but it’s going to require direct engagement ... repeated engagement.”

That engagement is taking place, Gibson said, conversations about what the needs are, what Hilcorp can do, and how it needs “to invest to provide line of sight” for the company on where it needs to deploy its resources “and provide line of sight as well for the folks who are burning gas to keep their houses warm and keep the lights on so that they can make rational decisions on what their alternatives might be.”

And what about a line bringing gas from the North Slope?

If there is such a line, Barnes said he wants access, because if Hilcorp can put gas in that line, it creates opportunity.

Consent decree terms

Hilcorp is operating under a consent decree negotiated with the attorney general’s office for the Marathon acquisition.

Gibson said that consent decree has provided something Cook Inlet hasn’t had — visible gas prices. While the Lower 48 has publications which tell you what the gas price is, the gas price in Alaska “has been a bit of a black hole,” he said.

The consent decree, which runs through the end of 2017, provides a signal to the market on prices, and when the Regulatory Commission of Alaska sees contracts “you’ll see prices through 2017.”

Hilcorp is telling local gas consumers that it has, “a conservative view of what we see as the available resource,” Gibson said.

Some of that gas is behind pipe already, he said, “but not much. Some of it can be found very quickly if we need to. ... And still another tranche of it is going to require ... more of an effort.”

The principle, he said, is “having a cooperative business relationship” with customers.

“What we’re saying is, the gas is there and we’ll go get it if you tell us to.”

But, he said, Hilcorp is not inclined to develop a surplus of natural gas.

“We will go develop what’s necessary and in fact we’ll probably over develop a little bit because we’re making fairly firm commitments to our customers and we absolutely are committed to meeting those under our contracts.

“The gas is out there,” Gibson said, “but it’s not just lying around the warehouse.”

Two-pronged strategy

Barnes said it is really a two-pronged investment strategy: identifying “a reserve base that we can continue to market” with some investments “geared more towards reserve definition” and the “just-in-time delivery ... focused on developing deliverability as supply meets the market.”

The goal, Barnes said, “is not to have a lot of investment waiting for the market to develop our deliverability.”

But whether gas is needed for the Donlin Creek mine or other possibilities, “we know we need to start getting a line of sight on reserves.”

Gibson said Hilcorp’s objective is contracts through 2017 “with all those interested in buying gas from Hilcorp so they can plan their business rationally for the next several years and we can plan our business rationally over the next several years and everybody can kind of sleep at night and go about their regular day jobs without their hair on fire because there’s a lot of concern and fear, frankly, in regard to where we are in the Cook Inlet on natural gas supplies.”

Hilcorp wants to turn the gas it finds into revenue, but it also wants it customers “to make rational decisions about how they need to plan their long-term business so that they don’t feel like they need to pull the trigger on something that may be irreversible today and they’ve got line of sight on how and when they need to make critical decisions in regard to the long-term future.”

Gibson said Hilcorp is “currently in discussions with buyers and everybody who’s interested is getting as much of our time as they would like.”

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