Gloom, bright spots in oil, gas

Posted: Thursday, February 18, 2010

Crude oil production on the west side of Cook Inlet was hit with the wrong kind of boom this year, one that emanated from a belching volcano and was anything but a boom for the companies operating in the region.

In March of 2009, the eruption of Mount Redoubt sent mudflows from melting glacial ice down the mountainside, ultimately causing federal, state and industry leaders to agree to close Cook Inlet Pipeline Company's Drift River Oil Terminal at the mountain's base in early April.

The terminal, which stored crude for pickup via tanker, was a critical link for west side producers.

As the mountain continued to rumble, it became clear the terminal would not be reopening anytime soon, and eight connected offshore platforms operated by Chevron, as well as some onshore facilities operated by Pacific Energy Resources, were forced to shut-in.

In August, the terminal reopened in a limited capacity and production was restarted.

While Chevron resumed operations in its affected offshore platforms, company officials said they did not expect them to return to pre-eruption production levels, a bad sign for a region in which production peaked almost three decades ago.

At the same time, the terminal, which formerly stored oil for pick up, is now being run as a "tight-line operation," in which crude is delivered directly to a waiting tanker, requiring more frequent pick-ups and higher costs to producers.

The volcano also dealt a fatal blow to Pacific.

The financially embattled company, which had sought to sell off its assets, was ordered by a Delaware bankruptcy judge to abandon them in September.

Mount Redoubt was the final nail in the Long Beach, Calif.-based company's coffin.

Pacific held state oil and gas leases, the West McArthur River field, the Redoubt Shoal field, the Osprey platform and its Kustatan onshore production facility and the West Foreland field with two producing natural gas wells.

The company also gave up exploration acreage and a stake in the Three Mile Creek field.

The state, meanwhile, was left to pick up the pieces.

In mid-December good news finally appeared on the horizon.

Anchorage-based Cook Inlet Energy LLC acquired the abandoned facilities for $2.25 million, paid to Pacific after a Delaware judge vacated the abandonment order for all of Pacific's operated facilities.

According to CIE, the assets were valued at $327 million by independent auditors in March of 2008.

Company officials from CIE, which formed in January of 2009, said they planned to resume production at their onshore facilities quickly, but said bringing the offshore platform, the Osprey, back online would require more time and resources.

CIE didn't pick up all of Pacific's assets in the deal either, leaving behind a 46.8 percent share of the Chevron-operated McArthur River Field, also known as the Trading Bay Unit, the Trading Bay Field and the Trading Bay Production Facility, and a 50 percent share in the Cook Inlet Pipeline Company.

Officials from the company estimated it would employ 12 or 13 field workers and said they were hoping to get some of Pacific's former workers back.

In late November, at about the same time CIE was hammering out the final details of their purchase, CIPL proposed to the Regulatory Commission of Alaska to increase its rate for shipments by 259 percent, effective Jan. 1.

CIPL requested a $10.51 rate increase, from the current $4.06 charged per barrel to $14.57 per barrel.

The RCA suspended making a decision on the proposal, but temporarily approved the rates as proposed.

The charges are refundable pending a final decision by the RCA, due before June 30.

Officials from CIE filed a protest with the RCA against the proposal and said they were concerned that if Chevron were to "pull out," the pipeline would no longer be sustainable.

If that were the case CIE chiefs said the company might lose its only means of getting their product to market.

Chevron is in an odd position as Chevron Pipeline Co. operates the company that wants to raise its rates.

Chevron meanwhile, did not file a protest against the rate increase.

Bill McAllister, spokesperson for the attorney general's office, said the state did not protest CIPL's request either.

"The state's tariff experts have reviewed CIPL's filing and have confirmed that the sharply higher rate is a result of the unanticipated drop in throughput levels and increased operating expenses as a result of the Mount Redoubt volcanic activity," McAllister wrote in an e-mail. "We expect that the rates will drop toward historic levels in the filing for 2011."

Santana Gonzalez, CIPL's spokesperson in Bellaire, Texas, confirmed that.

On the east side of the inlet things were certainly a bit quieter, but not completely.

A move by ExxonMobil to acquire the assets of Houston based natural gas giant XTO Energy may pass two offshore crude producing platforms to Exxon.

XTO currently hold two platforms, XTO A and C, located off the coast of Nikiski in the Middle Ground Shoal Oil Field.

According to the Department of Natural Resources Division of Oil and Gas, in 2008, production averaged about 2,800 barrels of crude a day.

The platforms are tied via pipeline to the peninsula.

Production in the fields has steadily declined since the early 1970s.

XTO generally focuses on natural gas, and the company's Alaska assets are a tiny fraction of their global holdings.

To the south, Pioneer Natural Resources, an Irving, Texas-based company that took full control of the Cosmopolitan field off of Anchor Point in 2006, will conduct a well appraisal on part of the reservoir already tapped into before drilling another separate appraisal well.

The site could be producing oil within five years, Pioneer officials said.

If that were to be the case, Pioneer is also planning a separate, 20-acre offshore processing plant facility. The company submitted an all-encompassing building permit to the state covering the processing plant, water treatment plant and other drilling operations.

All-in costs, including drill operations and the treatment plant, could total $400 to $500 million.

Pioneer is not planning an oil pipeline but has said they will rely on truck transportation to carry the oil to the Tesoro refinery in Nikiski, which would be the primary purchaser.

Gloom, bright spots in oil, gasIt was a far less exciting year for natural gas in Cook Inlet, though not without event.

Perhaps the biggest news of the year came in December, when DNR released a study assessing the future of the of the Inlet's gas reserves.

According to the DNR, there's more than a trillion cubic feet of gas left in the 28 producing gas fields in Cook Inlet.

The study, which was launched this past spring as a result of questions about gas shortages and the possibility of blackouts this winter, did not attempt to determine how much gas remains in unexplored resources.

The report also did not address some of the economics of getting the gas to market.

Tom Irwin, the department commissioner, said as part of the release of the study, that about 20 percent of the reserves' original capacity was left but, "The most accessible gas has been produced and the remaining gas may carry an increased cost."

That's a statement that's been echoed by producers.

Marathon Oil Company has been particularly vocal at industry events in warning that Southcentral's days of buying cheap gas may be numbered.

Company officials have said the market here doesn't demand exploration or expansion.

They've also said the local utility market doesn't offer enough of an economic incentive.

ConocoPhillips' license to export Liquefied Natural Gas at their Nikiski facility expires in March of 2011, and the company's Cook Inlet assets manager has been non-committal on the issue of renewal.

Some of the more promising news of the year has come from Marathon, whose appropriately named Sunrise well, about six miles east of the Swanson River oilfield, is rigged for drilling and is expected to spud shortly.

Local utilities like Homer Electric Association have also indicated they're willing to continue to bet on natural gas for the near future.

HEA announced a proposal in late January to add a steam turbine to their currently operating gas fired turbine at the Agrium facility in Nikiski.

The turbine would capture heat that's currently being produced and let off into the atmosphere from the gas fired turbine. They've also proposed to build two additional gas fired turbines in Soldotna, but are putting priority in the Nikiski project.

While the region's energy future's in the coming decades are not as clear, industry executives and market experts have indicated gas remains the reliable investment the company can make in the near-term.

Clarion reporter Andrew Waite contributed to this report.

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Dante Petri can be reached at

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