Alaska's Cook Inlet Gets Renewed E&P Activity

Abstract: The offshore "hot spot" of the 1960s is undergoing a regeneration, thanks both to independent producers and even some major companies.

Analysis: Alaska's Cook Inlet is undergoing a rebirth, thanks mostly to new exploration technology and, to a lesser degree, to independent operators, who always seem capable of finding significant oil and gas reserves in so-called "mature" development areas.

While most of the major companies who, beginning back in the 1960s, developed fields beneath the Inlet, have left the area, a few have stayed. Today, remaining majors and newer-to-arrive independents are working both alone and in concert to wrest fresh production, including natural gas, from areas that were cast aside decades ago as too small to mess with.

And it may be that as early as this summer, at least one mobile offshore drilling rig will be at work in the upper Cook Inlet for the first time in at least a decade. Despite its awesome tidal exchange, such rigs can be used handily due to the Inlet's relatively shallow water depths.

During only the past two or three years, new cooks have re-stirred the Cook Inlet pot. For example, Denver-based Forest Oil, a large independent that came by its properties there in a merger with Forcenergy Corp. that was announced mid-July 2000 and consummated in December of that year, recently put its Redoubt Shoal field - with about 100 million barrels of recoverable oil reserves - on production. Two wells on the company's four-well-slot Osprey platform, the first new production structure built for installation in the Inlet in 20 years, currently are producing about 4,200 barrels per day of low-sulfur oil. Forest hopes to more than double that rate when the remaining wells are completed.

It's perhaps typical that the productive potential of the Redoubt Shoal prospect has been known for a long time. Among others, Pan American Petroleum Co., a predecessor of Amoco, had encountered oil shows while drilling in the area, but had declared the potential reserves to be uneconomical. In the 1960s, they probably were. But new seismic and drilling technology, coupled with industry experience gained in producing oil from beneath the Inlet, have allowed today's companies to benefit from comparatively lower development costs. Higher average oil prices have helped, too. But while some oil heavyweights like Shell left the Inlet scene ages ago, other majors have remained.

Unocal, for instance, a long-time operator in southwestern Alaska, recently announced new oil strikes drilled in one of its four offshore fields in Cook Inlet. Apparently not game to turn its back on its widespread production infrastructure in the Inlet area - 10 production platforms, both offshore gathering systems and onshore pipelines - the company began melding advanced drilling and analytical technologies with existing well records and seismic data to identify new reserve horizons. As a result, Unocal completed two wells late last year from its King Salmon platform in the venerable McArthur River field that flowed at initial rates of 8,552 and 1,100 barrels per day, each from different zones. The first well, which set a production rate record for the Inlet, confirmed an accumulation of oil in the Hemlock area on the northern flank of the field. The company says estimated recoverable reserves are more than 35 million barrels. The new oil has pushed production from the King Salmon platform, built in the late 1960s, to its highest level in nearly 20 years.

For Unocal, the new strikes apparently are what are known elsewhere and in the oilpatch as "lagniappe" – something gained gratuitously, a little added gift that keeps them interested. The company estimates that the cost of identifying and drilling for the new production was about $18 million. The payout should be a short-term proposition, since the oil is going into the existing pipeline infrastructure, ending at the Tesoro Petroleum refinery at Nikiski, which serves the Anchorage/Kenai Peninsula market exclusively.

It's been perhaps lucky that Forest is a working interest partner in the Unocal wells. That allowed them to flow Redoubt Shoal production to the McArthur River gathering system while they complete new onshore production facilities to handle both flow from the Osprey platform and what they hope will be future Cook Inlet production.

That's because, in addition to properties in the Gulf of Mexico and in the Canadian Arctic, among others, Forest inherited a large inventory of undeveloped Alaskan prospects from Forcenergy, which had experienced financial problems prior to the merger. The Redoubt Shoal field operation already was underway, with the Osprey platform having been used first as a drilling unit, then later as the well platform.

But Forest also wound up with several other Cook Inlet properties in which Forcenergy had majority working interests, each of which is thought to hold estimated reserves of 50 to 100 million barrels. These include the Sabre prospect, for which there is 3D seismic data, although no wells have yet been drilled. Forest is looking for partners to mount new exploratory drilling programs on those prospects. If such partnerships can be formed soon, they might be able to line up a rig - a jackup or even a floater - to test some or all of the inherited prospects, beginning perhaps as early as this summer.

But oil from fields directly beneath Cook Inlet is not the only new prospect for the Anchorage/Kenai Peninsula area. There's been an active search onshore for natural gas, a fuel for which the Anchorage area is developing a fast-growing shortage, all along the Kenai Peninsula.

Because of the impending shortage, two thrusts are being made to generate new gas supplies. On the one hand, several independent companies are testing the potential of the methane-rich coals that abound in the area (see Oil & Gas Advisory, December 9, 2002: "Coalbed Methane Search Expands to Alaska"). On the other hand, both majors and independents are actively exploring for conventional natural gas on the Kenai Peninsula along the western shore of the Inlet.

Small gas fields dot the peninsula, and most are connected to both local and even overseas markets.

Unocal has long been an onshore Kenai gas developer, as have Phillips Petroleum (now ConocoPhillips) and Marathon. Many wells have been drilled from land directionally to reserves just offshore.

ConocoPhillips, with a 70 percent working interest, has owned and operated a liquefied natural gas (LNG) plant with partner Marathon near the town of Kenai since the early 1960s. This plant, built long before the gas shortage loomed, gets most of its feedstock from ConocoPhillips's North Cook Inlet field, which is an offshore field discovered in 1962 from the company's Tyonek platform. The plant's capacity is 1.5 million tons of LNG per year. The companies' license to provide LNG to Japan is good until 2009. After that, it's a toss-up as to whether the gas would be used for export.

Meanwhile, a number of independent companies have become interested in Kenai gas, spurred mainly by the imminent shortfall.

One such company is Aurora Gas LLC, a privately funded company based in Houston.

Aurora purchased a small gas field from ConocoPhillips recently, and also acquired all of Anadarko Petroleum's Cook Inlet area leases. The company is preparing to conduct a 3D seismic program over those properties this year in search of new gas reserves, particularly at shallow depths of 2,000 to 3,500 feet. Depending on the results of this year's work, the company said it could extend its seismic acquisition program into 2004.

So far, Aurora has drilled several successful development wells on its properties, and plans to connect them to the existing Kenai area pipeline system, which supplies gas to local communities, including Anchorage.

But Aurora and other independents hope that gas prices in Alaska, which are controlled by the state, will be increased as an incentive for more exploration. And they're also keeping in mind the possibility of a major gas pipeline from the North Slope southward to the contiguous U.S., which could be connected to Kenai area production, should the local shortage be mitigated.

So, with lower development costs and new technology, along with added incentives and higher average prices for their production, some independents and even some smaller integrated companies are helping to remake the Cook Inlet/Kenai Peninsula region into a notable exploration and production sector. They recognize that they can realize economies of scale from areas long considered over the hill by their larger counterparts. And the Cook Inlet area appears to be one of them.

Associate Editor: Robin Beckwith

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