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Cook Inlet overview: powerful and positive effects on the region.

Cook Inlet's "oil patch" is a busy place these days. Hilcorp Energy, a Houston-based independent company, has boosted oil and gas production in several of the aged oil fields the company purchased from Chevron and Marathon Oil in 2012 and 2013.

In December, 2013, Hilcorp was producing almost 11,000 barrels per day of oil, almost double what the fields it now owns were producing in 2012 when Hilcorp assumed ownership. Total Cook Inlet oil production has increased 50 percent from 2010 to about 15,000 barrels per day today.

At its peak in the 1970s, Cook Inlet produced 225,000 barrels per day.

In another development, Furie Alaska Operating, another independent also based in Houston, plans to install a new gas production platform and to lay undersea gas pipelines this summer. Furie is privately-owned and doesn't divulge much about its operations.

Meanwhile, Tesoro Petroleum Corporation is working on its plan to build a new cross-inlet oil pipeline, although its construction has been pushed back to next year. This project was initiated by Cook Inlet Energy, another independent redeveloping the small Redoubt Shoal field on the Inlet's west side, and subsequently taken over by Tesoro.

Finally, ConocoPhillips has reopened its liquefied natural gas (LNG) plant at Nikiski, near Kenai, and will send its first shipload of LNG to Japan in May. It is the first of six shipments planned for this year, ConocoPhillips spokeswoman Amy Burnett says.

On the downside, another independent company, Buccaneer Energy, has been hit with financial problems and has had to downsize its plan to aggressively explore several offshore Cook Inlet prospects.

The company still hopes to drill one important target this year, however. It is a potential deep oil prospect in ConocoPhillips' North Cook Inlet Unit. ConocoPhillips now produces natural gas from a gas field, but Buccaneer believes there is oil in deeper formations and hopes to test those in a "farm-out" arrangement with ConocoPhillips. Buccaneer still has some gas production from its small onshore Kenai Loop field, however.

BlueCrest Energy, another Texas-based independent, has plans to drill further tests at the Cosmopolitan oil and gas offshore prospect near Anchor Point. BlueCrest and Buccaneer made a gas discovery at Cosmopolitan, which also holds oil in a deeper reservoir, but the gas deposit must be further tested before it will be known whether it can be produced.

Armstrong Oil and Gas, another independent based in Denver, is also further developing its small North Fork field northeast of Homer. North Fork is now producing gas that is being transported through a small pipeline to connect with an ENSTAR Natural Gas Co. pipeline at Anchor Point.

That pipeline has now been extended to Homer to bring natural gas to that community for the first time.

LNG Plant Reopens

The reopening of ConcoPhillips' LNG plant is hugely important to the independents exploring in Cook Inlet. That is because the company will accept gas from other producers for the first time, making the gas into LNG and assisting those firms is selling the LNG. Previously ConocoPhillips had only processed its own gas and gas owned by Marathon Oil Co. when that company owned a share of the LNG plant (ConocoPhillips bought out Marathon's share).

State Natural Resources Commissioner Joe Balash had urged ConocoPhillips to reopen the plant last fall so as to provide a market for independents that are discovering gas, and in previous years the Division of Oil and Gas had urged the company to accept gas from other producers.

That ConocoPhillips will now make capacity in the plant available for independents is a breakthrough. As long as the LNG plant was shut down or would not accept gas from others, the independents had no one to sell gas to except the Southcentral regional electric utilities and ENSTAR Natural Gas Co., the regional gas utility.

Hilcorp Energy has recently signed contracts to supply all the utilities through early 2018 and is in discussions for supplying gas beyond 2018. Until ConocoPhillips announced its plan to reopen the LNG plant, the independents had no one to whom they could sell gas, at least in the near-term, and the serious problem that this presented was that, without a market, some of the independents would have a tough time raising money for exploration. With ConocoPhillips now accepting gas at its LNG plant, this problem will be eased.

While the independents exploring in the Inlet are really after oil prospects because the value of crude oil is so much higher than gas, the very good prospect that gas will be found provides an opportunity for early revenues, but that depends on a market being available.

ConocoPhillips' road to the reopening of the LNG plant has been a long and bumpy one. The plant was first built and opened in 1969, along with the urea fertilizer and ammonia plant now owned by Agrium Corporation, to provide a market for large supplies of natural gas that were surplus to the regional utility needs.

Both became casualties of shortages of gas from Cook Inlet as reserves in gas field declined. Agrium's plant was closed in 2007 and the LNG plant was put into suspended status in 2013.

In 1969 the undertaking by Phillips Petroleum Co. (now ConocoPhillips) and Marathon Oil to build the LNG plant was a daring one because there had previously not been transport of LNG by sea over long distances, and the import of LNG was also a first for Japan.

Since then a vast industry of international, long-distance LNG shipments has developed and Japan and other Asian nations have seen their imports of LNG multiply.

Through all those years, from 1969 to 2012, the Kenai plant continued sending its LNG to Japan, never missing a shipment. That record of reliability puts Alaska in good stead as the state and North Slope producers try to develop a much larger LNG project, also at Nikiski.

Meanwhile, it was encouraging that the US Department of Energy (DOE) gave approval for resumed exports of LNG and allowed ConocoPhillips' application to export to jump ahead in a long line of Lower 48 LNG projects seeking approval for exports.

The Lower 48 projects have sparked serious opposition from the chemical industry and others who are benefitting from low domestic gas prices, and there were fears that the application to resume exports from Nikiski would get caught up in that. DOE's approval has shown that it has separated Alaska's projects from the Lower 48 applications. That has allowed ConocoPhillips to resume shipments beginning in May, and it bodes well for DOE approval of a much larger Alaska LNG project if it occurs.

Dry Holes and Delays

The sagas of Furie and Buccaneer illustrate what can happen when small independents, and more particularly their CEOs, come to Alaska and things go wrong even, in Furies case, temporarily.

Both companies were essentially formed around industry veterans who, acting as entrepreneurs, gathered geologists and technical staff to pursue opportunities in Cook Inlet they believed were bypassed by the major companies who explored there in the 1960s and 1970s.

One was Danny Daniels, a colorful Texas wildcatter, who formed Escopeta Oil and Gas and acquired Cook Inlet leases over areas he thought held large quantities of untapped gas. The prospects were far from shore, however, so Daniels needed to find a drillship or a jack-up rig, which is a floating rig that puts steel legs down to the seafloor and then "jacks" itself up on the legs.

Daniels raised investment funds and found a suitable jack-up rig in the Gulf of Mexico in 2006 and also secured an exemption from the US Jones Act to use a foreign heavy-lift ship to bring the rig to Alaska (there were no US-built heavy-lift ships). However, the financing fell apart, and by the time Daniels put it back together in 2010, the federal administration had changed and a renewal of Daniel's Jones Act exemption was denied.

Daniels gambled, hired a Chinese ship anyway, and brought the Spartan 151 rig, contracted from Spartan Drilling Co., to Cook Inlet, meanwhile hoping the federal government would relent while the rig was en route. It didn't. Daniels' investors rebelled and replaced him and even renamed the company Furie. Furie was later hit with a $15 million fine for flouting the Jones Act.

Furie did get the rig in place, however, and drilled its wells, making the gas discovery that is now being developed. The investors Davis brought in, from Germany, are still with the company.

Buccaneer pursued its own approach built on a strategy of having several prospects, onshore and offshore, and has also had successes and bumps--and more bumps recently.

The company was formed by Curtis Burton, an industry veteran, who brought former ConocoPhillips veterans Mark Landt and James Watt into the company. Landt and Watt had ideas about Cook Inlet oil bypassed in the early years.

Buccaneer brought a jack-up rig to Cook Inlet, too, but from Asia, so there was no Jones Act issue. A Chinese heavy-lift ship was also used, and it was legal. Buccaneer was short of cash, however, so it brought in the state of Alaska, through the Alaska Industrial Development and Export Authority, as an investor in purchasing a jack-up rig.

It was a highly unusual move for AIDEA, which previously had invested in or financed onshore infrastructure like docks, industrial roads, and support facilities like an ore terminal.

The need for a jack-up rig in the Inlet was urgent because of worries on pending gas shortages, and at the time it wasn't at all certain that Danny Davis would really get the jack-up rig hired by Escopeta to Cook Inlet. AIDEA decided to help Buccaneer to ensure there was at least one jack-up rig available.

Mobilization of Buccaneer's rig, the Endeavour, was delayed by technical problems, and Buccaneer missed its first deadlines for drilling the offshore oil prospects and went directly to winter moorage at Port Graham. It drilled the following spring at Cosmopolitan where Buccaneer was a minority partner with BlueCrest, and gas was discovered.

Meanwhile, Buccaneer had earlier developed its small Kenai Loop field near the city of Kenai, and two gas wells brought into production gave the company some income. That gas is being sold to ENSTAR Natural Gas Co.

But last year bad luck started to hit. Drilling at Cosmopolitan took longer than expected, and when Buccaneer repositioned the Endeavour rig at Southern Cross, one of the two Inlet prospects it hoped to drill, one of the three platform legs landed in unstable soil. The season was late, with winter approaching, so the company decided to take the rig to Port Graham for winter moorage. Meanwhile, an onshore gas exploration well east of Homer, West Eagle, turned up dry, a disappointment for the company.

The cumulative financial effects of the dry hole costs, the delays in drilling Southern Cross, and a delay in bringing a third Kenai Loop gas well into production due to a dispute with a neighboring landowner, Cook Inlet Region, Inc., caused the small company financial distress.

Buccaneer's board suspended Burton, its CEO, in early 2014 as the search for additional capital got underway. An announcement of the company's plans was expected in late April.

Powerful and Positive Effect

However, the resurgence of activity in Cook Inlet is having a powerful and positive effect on the regional Southcentral Alaska economy. A study on Cook Inlet published in April by Northern Economics, an Anchorage-based consulting firm, says Cook Inlet petroleum operations employ about 1,300 with an annual payroll of about $350 million and a total economic impact of over half a billion dollars.

When that is combined with the employment and benefits of the Tesoro refinery near Kenai, which depends partly on Cook Inlet oil, and the economic benefits of natural gas production in lower costs of space heating and power generation, the total economic impact comes to about $4.7 billion. That is 10 percent of the total Gross State Product of about $47 billion.

The Northern Economics Report was sponsored by the Anchorage Chamber of Commerce.

Mike Bradner is publisher of the Alaska Economic Report and Alaska Legislative Digest.
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Title Annotation:OIL & GAS
Comment:Cook Inlet overview: powerful and positive effects on the region.(OIL & GAS)
Author:Bradner, Mike
Publication:Alaska Business Monthly
Geographic Code:1U7TX
Date:May 28, 2014
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