Alaska warms up to a 'middle-aged' but reinvigorated Cook Inlet

In mid-November, south-central Alaska was hit by freezing rain followed by subzero nights, a clear sign that the state's abnormally warm autumn was at an end. During frozen winter days, the Anchorage area's energy demand regularly skyrockets by more than 200 percent.

To keep the heat and lights on in Alaska's most populated region, local utility companies primarily burn natural gas from the Cook Inlet, a 300-mile finger of water that stretches from the Gulf of Alaska to Anchorage.

Oil and gas companies have been pumping fuel from onshore and offshore inlet fields for more than 50 years. The federal government estimates that 7.8 trillion cubic feet of natural gas has been produced from the region with an additional 19 tcf still waiting to be discovered.

But for the past decade, gas production declined as energy developers in the inlet drilled fewer new wells and chose not to reinvest in their existing facilities.

In 2003, the inlet produced 205 million cubic feet of gas. Last year 110 million cubic feet of gas was pumped from area wells, according to the Alaska Oil and Gas Conservation Commission.


As production plummeted, the Cook Inlet was labeled a "dying basin," and Alaska utility executives warned that they might have to import liquefied natural gas from Canada to heat Alaskan homes and fuel electric plants.

This winter, however, Alaska's energy woes have eased as nearly a dozen independent oil and gas companies are breathing new life into the inlet's energy extraction industry.

Houston-based Hilcorp Energy Co., which is revitalizing the inlet energy assets that it bought from Chevron Corp. and Marathon Oil Corp., has contracted to provide natural gas to the south-central utilities through early 2018.

The newcomers are sinking a string of new wells in the inlet. In July 2011, only three rigs were operating in the region. This July, that number jumped to 16 with companies gearing up for more activity in the coming years.

Eleven new gas wells have begun production in the inlet since August 2011, according to Peter Stokes, an expert on inlet gas production at Petrotechnical Resources of Alaska, an energy consulting firm in Anchorage.

"It's a very good uptick from what we'd seen the previous three years," Stokes noted last month at the Alaska Resource Development Conference.

But lingering questions remain about the area's long-term gas production, he noted. "There are still going to be potential shortfalls unless there's a whole lot more gas development work," Stokes said.

Utility company officials agree. Jim Posey, general manager of Anchorage Municipal Light and Power, warns that he and other utility executives have no guarantee that they'll be able to keep homes warm and the lights on beyond their current five-year contract with Hilcorp.

"We went from a sense of emergency in the 2009-to-2013 time period ... to a sense of urgency today," Posey said at the recent Alaska Oil and Gas Congress.

Noting that the independents will be relying on relatively small pools of gas to fill the utilities' needs, he added that "we're still looking at the continued success of Cook Inlet. Nobody's found 1 trillion cubic feet [of gas] yet."

But Hilcorp President Greg Lalicker said Posey has nothing to worry about for the foreseeable future.

"The fields of the Cook Inlet aren't dying," Lalicker said at the Alaska Resource Development Conference. "They're just middle-aged. There's another 20, 30, 40 years of activity to be done out there for the late-life portion of these fields. And that's what we're up here to do."

Hilcorp invested $300 million in Cook Inlet energy development this year and expects to make similar investments in 2014, Lalicker reported.

"We don't think we're going to run out of gas anytime soon," he said.

'It was boom time in Alaska'

The story of the Cook Inlet is intrinsically linked to the history of Alaska.

Even before the United States purchased the Alaska territories in 1867, oil prospectors were finding small oil seepages along the inlet. The first U.S. oil claims were filed in the 1890s.

Serious commercial interest in the state didn't blossom, however, until 1957. That's when the Richfield Oil Co. of California discovered a large crude deposit at Swanson River, located along the Cook Inlet's eastern shore.

Alaska's first governor, William Egan, credited the Swanson River find with convincing Congress that the Last Frontier could become economically independent. Statehood followed in 1959.

During the 1960s and early 1970s, oil and gas companies flocked to the Cook Inlet region in search of promising new energy resources. In its heyday, most of the top international energy companies were operating in the inlet -- from Amoco to Union Oil.

Mike Navarre, mayor of the Kenai Peninsula Borough, remembers growing up during the region's economic explosion. "Back in mid-'60s when I was in junior high school, we had to have a split shift because we didn't have enough schools to handle the influx of people coming in," he recalled recently.

"It was boom time in Alaska."

Industry interest in the Cook Inlet began to fade in 1968, when a mother lode of oil was discovered on Alaska's North Slope. By the time the TransAlaska Pipeline was completed and North Slope production began in 1977, the peninsula's economy had cooled.

By the late 1970s, a handful of major energy companies continued to pump oil and gas from their Cook Inlet legacy wells. But most didn't explore for new wells or invest in cutting-edge production technologies.

Inlet gas production peaked in 1994. At the time, the oil and gas companies were covering the heat and electricity needs of Anchorage-area utilities. They also kept the Agrium Inc. fertilizer plant in Nikiski supplied with natural gas. And they delivered a steady flow of fuel to ConocoPhillips' LNG export facility, which shipped a total of 2.5 tcf of gas to Japan over 43 years.

In the years that followed, as the inlet's oil and gas production steadily declined, Agrium shuttered its fertilizer plant and ConocoPhillips stopped exporting gas. More recently, the oil giant filed an application to restart its shuttered LNG plant (EnergyWire, Dec. 13).

The business climate worsened in 2008, when the Alaska utility commission turned down a request by Anchorage-based Enstar Natural Gas Co. to sign a long-term fuel contract with Marathon's Alaska operations.

The commissioners objected to Marathon's proposal to tie their gas rates to the Henry Hub market prices set in the lower 48 states. Instead, state regulators created a commission-mandated price cap.

In the aftermath, Marathon and Chevron put their Cook Inlet natural gas and oil assets up for sale.

"That really turned everything on its head," said William Barron, director of Alaska's Division of Oil and Gas. "The utilities were in a conundrum because they no longer had a long-term supply."

By 2010, the utility companies were warning that they might have to import LNG to fill the heat and electricity needs of Anchorage and other south-central communities.

That threat spurred the Alaska Legislature to action. In 2010, lawmakers created a generous rebate program that refunds up to 65 percent of a company's exploration costs associated with drilling at offshore or onshore leases. Alaska also rebates up to 45 percent of the development costs.

A year later, independent oil and gas companies were clamoring for a piece of the Cook Inlet action. During Alaska's annual inlet lease sale, the state auctioned off 108 tracts for a record $11 million.

In 2012, energy companies bought 44 tracts for $6.9 million. This year, companies acquired 28 tracts for $420,000. Another state leasing sale is expected in May 2014.

The Legislature also provided tax breaks that helped finance construction of new natural gas storage facilities in the Kenai Peninsula.

Anchorage Municipal Light and Power's Posey argued that the tax rebate program is a powerful draw for the independent energy companies.

Posey said that in meetings with the newcomers, "I'd ask them, 'Why are you here?' [They said] the market looked like it was improving. But the incentives, the tax credits moved the needle."

John Hendrix, general manager of Apache Corp.'s Alaska operations, agreed. "It changes the breadth of our operation," he said. "Instead of spending X, you spend Y because there's protection and incentives. You can spend more money, get more area because they're covering a percentage of it."

Rehab for old basins

Today the Cook Inlet is dominated by rehab companies -- oil and gas independents with low overhead, a talent for reworking old wells and an eagerness to use new exploration technologies.

"We're great at going back into old basins and churning it and delivering," Apache's Hendrix explained.

Hilcorp and Apache have the biggest stakes in the inlet. Hilcorp is producing the most oil and gas; Apache controls the largest amount of inlet acreage.

Hilcorp's dominance in the Cook Inlet came at a price. After the company acquired Chevron's Alaska properties in 2011, its bid to buy Marathon's assets was delayed by Federal Trade Commission antitrust concerns.

In early 2013, Alaska state officials helped broker a consent agreement ending the FTC standoff. The accord capped the prices that Hilcorp can charge for its gas through early 2018. Those rate limits were subsequently included in the company's five-year contracts with the Anchorage-area utilities.

Since taking over the Chevron and Marathon holdings, Hilcorp has been reworking and updating its oil and gas wells, in some cases with remarkable results.

Hilcorp's new assets include the historic Swanson River oil site, which Hilcorp's Lalicker said was producing 500 barrels of oil per day when his company took over the facilities. Today it's pumping 2,500 barrels each day.

The company's gas fields are also reviving. The Deep Creek gas field in the southern Kenai Peninsula was producing 4 million cubic feet of gas each day when Hilcorp acquired the site. Thanks to new upgrades, the site could produce 13 million or 14 million cubic feet a day "if we're really pushing it," Lalicker said.

"This year we've had good success," he noted. "You can see what we've been spending money on -- capital projects, new drilling and facilities, expense work, repairing broken stuff, shooting new seismic for some of our exploratory plays.

"In 2014, we'll have another year where we'll spend another $300 million-plus and continue doing this as long as we're having success," he added.

Lalicker is already laying plans to extend Hilcorp's five-year contracts with the south-central Alaska utilities for another year.

"This April, we're going to sit down with the same utilities and tell them the success we've had in growing our rate of reserves and say OK ... what do you need for the next year?" he explained.

"We're going to keep rolling this forward as we keep spending money, developing up and proving up more reserves."

A more studious approach

In the meantime, Houston-based Apache, which is targeting mostly oil, is taking a bottom-up approach to Cook Inlet development, conducting extensive seismic studies on its inlet lands.

"We've shot 320 square miles of seismic in 2011 and 2012," Hendrix noted. "We're studying the rocks of the reservoirs" before beginning future production. Apache is advancing a new generation of wireless seismic technology.

A wide variety of other independents have also set up shop in the Inlet, from Alaska-based Cook Inlet Energy LLC to Australian wheeler-dealer Buccaneer Energy Ltd. (EnergyWire, Oct. 29).

Last year, Buccaneer and Furie Operating Alaska LLC each hauled jackup rigs into the inlet in hopes of tapping the region's deep offshore oil resources. In its first try, Buccaneer found an estimated 44 million barrels of oil and 96 billion cubic feet of gas at its Cosmopolitan lease at the southern end of the inlet.

"You're starting to see the benefits of the tax incentives," said Kara Moriarty, executive director of the Alaska Oil and Gas Association.

"It's starting to create the kind of problems that you want, like the need for more trained workers," she noted. "We lost a lot of workers either through retirement or other opportunities as the Cook Inlet activity started to slow down. So now we need to lure those people back."

With natural gas production expanding in the inlet, state officials recently sent a letter to ConocoPhillips asking the company to reopen its mothballed LNG export plant in Nikiski.

In response, the oil giant on Dec. 11 filed an application to restart its shuttered LNG plant. The company asked the Energy Department to expedite the application review and hopes to begin operations in the second quarter of 2014.

That's good news for the smaller producers that are looking for a place to sell their Cook Inlet natural gas. In fact, Cook Inlet producers Buccaneer, Cook Inlet Energy and Nordaq Energy Inc. provided letters of support for ConocoPhillips' DOE application.

Despite the flurry of new energy development activity and the addition of new gas storage facilities in south-central Alaska, utility officials stress that the Cook Inlet may only be the answer for this generation of Anchorage residents.

"We may be able to look beyond 2020, look at 2025 to 2027 feeling comfortable" about gas supplies, said Posey of Anchorage Municipal Light and Power.

But future generations will need far more resources, primarily from Alaska's North Slope.

The utilities have their hearts set on accessing the 34 trillion cubic feet of natural gas available on the North Slope.

That fuel, which was discovered during oil extraction operations, is currently reinjected into wells to maintain pressure.

Although Alaska has plenty of gas, transporting it from the frozen north to southern Alaska has been the subject of one of the most contentious and long-running battles in the state's history. The state of Alaska recently floated a plan to take an equity role in commercializing gas in the far north (EnergyWire, Nov. 20).

Alaska's proposal would mean joining forces on a pipeline project with TransCanada Corp. and the North Slope's three major energy producers -- BP Alaska, ConocoPhillips Alaska and Exxon Mobil Corp.

As the pipeline plans drag on, Alaska's most populous region is pinning its near-term hopes on the Cook Inlet independents.

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