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Could Cook Inlet's oil and gas renaissance transform Alaska?

Alex DeMarban

Thanks to favorable tax terms, high oil prices and a recently upgraded resource estimate, Cook Inlet could be on the cusp of an oil and gas revival, say a rush of independent prospectors punching holes into the big basin in Anchorage's backyard.

Apache Corp., a global oil producer, is drilling acoustic holes in west Cook Inlet to seismic-test much of the area's geologic potential. Houston-based Escopeta Oil and Gas recently announced that it discovered what may be Cook Inlet's largest natural gas find in 25 years. NordAq Energy Inc., with headquarters in London, Anchorage and Kenai, recently announced that it expects to soon produce up to 50 million cubic feet of natural gas a day from the northern Kenai Peninsula. And other companies are in the hunt.

If they can pump out even a fraction of the inlet's estimated natural gas and oil resources, their discoveries could be a game-changer for the state's energy plans.  

If enough natural gas can be produced from the inlet, does Alaska really need a multi-billion-dollar, state-supported pipeline from the North Slope to Southcentral? Could there be enough Cook Inlet gas to supply Fairbanks and some of Bush Alaska, reducing soaring energy prices beyond the Railbelt? And could there really be a big oil field lying in wait? 

The independents sure hope so. 

A one-time US energy heavyweight

Cook Inlet is like any maturing basin, said Jim Watts, chief executive for Buccaneer Energy Alaska. Major companies are moving out and smaller independents are moving in. But there are big differences between Cook Inlet and other old plays around the world. For one, it's largely unexplored. And the potential is vast.

It's an ideal situation with huge promise, said Watts, one of several Cook Inlet explorers presenting at the Resource Development Council for Alaska's annual meeting this week in Anchorage.  

Cook Inlet, the 180-mile-long water body known for its bore tides and beluga whales, once supplied a good portion of the nation's domestic oil. Since oil and gas production began there in 1958, companies have pumped out more than 1.3 billion barrels of oil.

But production peaked in 1970, shortly after the mother lode discovery on the North Slope. By 2010, oil production in Cook Inlet had fallen to an average of about 10,000 barrels a day, about one-sixtieth of North Slope production these days.

Interest in Cook Inlet waned in the 1970s because the most obvious sources of oil had already been produced, said Kevin Banks, a petroleum market analyst for Alaska's oil and gas division in the Department of Natural Resources.

"Further production would have to wait until the price of oil rose enough," drilling technology improved, and smaller companies were willing to come in and explore, Banks said.

All of that's happening now, with oil above $100 a barrel stoking interest, as well as generous state incentives that include tax credits for exploration work and a production-tax structure that falls under the state's old system.

There's apparently much more to explore. During Cook Inlet's heyday, explorers discovered oil in relatively shallow areas, said Ethan Schutt, an executive with CIRI Native Corp., a major landowner in the region working with independents and exploring the basin's vast coal potential.

After the discoveries, the companies turned their attention to production, leaving untapped several thousand feet of potential reservoirs throughout the basin. As Schutt described it, there's essentially another basin and a half waiting to be explored. 

Also driving some of the recent excitement is a U.S. Geological Survey estimate that upgraded the basin's energy resources. It said the basin could hold an estimated 19 trillion cubic feet of technically recoverable gas. That's enough to supply current gas needs for Southcentral Alaska's population centers -- Wasilla, the Kenai Peninsula and Anchorage -- for more than two centuries. (Technically recoverable means it can be produced with current technology.)

The USGS also said the region holds another 600 million barrels of technically recoverable oil. That's about three years' worth of North Slope production at today's rates. 

But how much can be economically produced? That's another matter. With so much unexplored, no one knows.

Apache, the largest lessee in the region with 800,000 acres, might help fill out the picture. Currently, Apache is engaged in a major 3D seismic exploration program -- onshore and offshore -- that's employing more than 200 workers in western Cook Inlet, said John Hendrix, general manager for Apache Alaska.  

The company wants oil, and they won't stop looking until they've drilled to bedrock, he said.  

Cook Inlet, overlooked and underestimated

Buccaneer, bringing in the Endeavour jack-up rig in a partnership with the state's Alaska Industrial and Development Export Authority, hopes to produce natural gas within three years to solve the shortage in Southcentral Alaska, said Watts.

There might be enough in the ground to ship liquefied natural gas to Fairbanks, and even get some to rural coastal areas, a concept the company is analyzing, Watts said.

The state shouldn't overlook the inlet's enormous energy potential, said Schutt.

State officials have historically focused most of their attention and investment on the North Slope. But most of the oil potential there lies on federal lands. Production on those lands is great for creating jobs, but not as great for bringing new revenues to the state budget, which relies largely on oil taxes and royalties.

Much of the oil potential in Cook Inlet, however, lies on state land. But the region needs new infrastructure, including improved port facilities and roads to get discoveries to market and reduce development costs. 

"We have to be careful in our public policy about all our focus being on the North Slope," Schutt said.

J.R. Wilcox, president of Anchorage-based Cook Inlet Energy LLC, a new company building a gas drilling rig on the west side of Cook Inlet, said development there is more expensive than at Prudhoe Bay, because everything must be flown in.

"There’s a lot of hustle in the inlet now," said Wilcox, referring to all the exploration.

He's optimistic, but finding the resources and producing them will require new infrastructure and take an enormous amount of money and energy.

"One shouldn't mistake green shoots for a crop here," he said. "We see a lot of potential, a lot of enthusiasm, but speaking as company that's not just an explorer but a producer, potential and reality are sometimes a long way apart from one another."

(Correction: This article originally said, in error, that Kevin Banks is currently director of the Division of Oil and Gas. He's a petroleum market analyst for the division.)

Contact Alex DeMarban at alex(at)alaskadispatch.com