Oil companies looking south for prospects

Posted: Sunday, August 26, 2001

Cook Inlet oil companies have applied to form two exploration units near Ninilchik and Anchor Point.

The purpose is unified development, said Mike Kotowski, units manager for the state's Division of Oil and Gas.

"You're taking diverse ownership and interests and operating as if it were one lease. They have to submit a plan of operations for the entire area. That will optimize the value of the hydrocarbons under the area," he said.

Without unified management, development in one area might draw down hydrocarbons in another, he said.

Phillips Petroleum Co. has proposed the Cosmopolitan Unit near Anchor Point, and Marathon Oil Co. has proposed the Ninilchik Unit, which reaches from Ninilchik to Clam Gulch.

The state and federal governments own all subsurface rights in the Cosmopolitan Unit, Kotowski said. All of the area is offshore, and all of it has been leased. The more controversial proposal is the Ninilchik Unit, which includes unleased areas and a potpourri of subsurface ownership.

"I've had people call me upset because they weren't included in the unit. I've had people call me upset because they were included," Kotowski said.

The Ninilchik Unit would span roughly 25,000 acres, of which more than three-quarters is offshore, he said. The state holds 77 percent of the subsurface rights. However, the area also includes dry land, and private individuals hold about 13 percent of the subsurface rights. Other subsurface owners are the federal government, Cook Inlet Region Inc. and the University of Alaska.

More than 90 percent of the Ninilchik Unit is under lease, said Brock Riddle, Marathon's regional land manager. Marathon, the operator, controls 60 percent of the leases and Unocal, its partner, controls 40 percent. Marathon and Unocal will be 60-40 partners in any new leases within the unit, Riddle said.

Kotowski said the state required Marathon to send copies of its proposed unit agreement to all subsurface owners.

Private owners can lease their subsurface rights to the oil companies, negotiate working interests or do nothing, he said. Lessors may collect rents, royalties and bonuses, and do not pay development costs. Holders of working interests share the costs of development and own a share of production.

"If you do nothing, a couple of things can happen, " he said. "Your land may be proven nonproductive, and you get nothing. If something is found on your land, you have the option in the future of becoming a lessor or negotiating a working interest."

The oil companies must negotiate access from surface owners, Kotowski said, but court decisions suggest that generally, surface owners cannot prevent access to subsurface oil and gas. However, those who lease subsurface rights can negotiate terms.

"You have the ability to say , 'No surface entry,'" Kotowski said.

Marathon and Unocal -- which Riddle said is independently considering prospects south of the proposed Ninilchik Unit -- have been trying to lease privately held subsurface rights. Kotowski said Unocal holds leases on a couple of prospects near Ninilchik and has been trying to tie up additional subsurface. He expects proposals to form one or two more exploration units in the area.

In the Ninilchik Unit, Riddle said, Marathon and Unocal already have leases from CIRI, the University of Alaska and about 60 percent of the private individual subsurface owners.

"We've been purchasing leases for a couple of years, and have been contacting everybody we can find," he said.

Deirdre McCombs, who lives near Mile 131, said her family has not signed the lease Marathon offered.

"Partly, it's because once you signed the papers, they had all the rights to come on your property," she said.

Marathon's proposal assigned interests in proportion to ownership, she said, and her family owns such a small fraction of the subsurface that they would see little profit from the lease.

Glenn Jennison, who owns land near Mile 132 Sterling Highway, said he has leased part of his land to Unocal.

"Most everybody around here has signed up with Unocal," he said.

The companies try to lease cheaply, and it pays to hold out for a better deal, he said.

However, Unocal has been a good company to work with, he said.

John Pherson, who lives near Mile 131, said he has not signed the lease Unocal sent him. Pherson said he has friends in Colorado who leased rights to oil companies, but the companies never developed the land.

"I don't want anything that's going to tie me up for 10 years," he said.

Riddle said Marathon is exploring to find enough natural gas to justify building a pipeline.

Last December, Unocal, Enstar Natural Gas Co. and Homer Electric Association announced an agreement to study the feasibility of a pipeline from the Kenai gas fields to Homer. That would carry south peninsula gas to northern markets and facilitate natural gas service for south peninsula homes and businesses.

Riddle said he expects Marathon will become a partner in the feasibility study.

He said the four-year plan of operations Marathon has proposed for the Ninilchik Unit includes drilling and seismic surveys. Marathon already has drilled the Grassim Oskolkoff No. 1 six miles south of Clam Gulch and done remedial work to the Falls Creek No. 1 well, which was drilled in the 1960s.

Depending on its evaluation of Grassim Oskolkoff No. 1, Marathon may drill more wells from that site or do seismic surveys, Riddle said. He said he has additional drill sites in mind. All of Marathon's plans call for drilling from onshore sites to reach offshore natural gas.

Phillips spokeswoman Dawn Patience said oil is the primary target in the Cosmopolitan Unit, which would span roughly 24,600 offshore acres just north of Anchor Point. The state owns roughly 14,835 acres of the subsurface, and the federal government owns roughly 9,765 acres. The unit includes seven state and two federal leases, in which Phillips, Forest Oil Corp., Anadarko Petroleum Corp., Exxon Mobil, Devon Energy Corp. and others hold interests.

Patience said forming an exploration unit would allow Phillips to develop finds that extend into more than one lease.

Phillips and Forest Oil are putting up the capital to test offshore prospects by directional drilling from a privately owned gravel pit, she said. The Hansen No. 1 drill site is roughly 5.5 miles north of Anchor Point and a half-mile west of the Sterling Highway. Phillips is paying three-quarters of the cost and will be the operator. It already has permits for the well, and has negotiated access from the gravel pit owner and the owner of land for an access road. Construction began several weeks ago, she said.

Phillips plans to begin drilling by early October. Hansen No. 1 will take several months to drill, she said. After that, Phillips could drill a second well or a side-track to explore additional areas. If Phillips discovers enough oil, it likely will build a pipeline to move it to market, Patience said. Future development proposals will be subject to public process.

The deadline for public comment on the proposed Ninilchik Unit was Aug. 21. The commissioner of the Department of Natural Resources now has 60 days to decide the application. The deadline to comment on the proposed Cosmopolitan Unit is Sept. 19.

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