Producers 2021: Heckuva bunch of work done, but obstacles remain
 Click here to go directly to this story within the full PDF version of this issue, with any maps, photos or other artwork that appears in some of the articles.
Under ownership of HEX, Furie Operating worked on all its Kitchen Lights production wells & much more since taking over
Kay Cashman Petroleum News
HEX Cook Inlet LLC became the newest producer in Alaska in the summer of 2020 when it closed on a deal to acquire the assets of Furie Operating Alaska LLC and related companies.
HEX CI is the only producer in the state that is owned by Alaskans.
The independent’s $5 million acquisition was the culmination of the intense bankruptcy proceedings of Furie and its partners Cornucopia Oil & Gas Company LLC and Corsair Oil & Gas LLC.
The centerpiece of the purchase was the offshore Kitchen Lights unit, which is the largest unit in Cook Inlet by acreage and which has been seen as a source of growth for the basin. The field is operated by HEX CI’s Furie Operating.
HEX CI is a joint venture between HEX LLC (80%) and Rogue Wave AK LLC (20%), which were founded by John Hendrix, who was raised in Homer and is an engineer. He has close to four decades of experience in the energy industry in Alaska, the Lower 48 and internationally with Apache, BP and Schlumberger.
Fixing what it bought At the time HEX CI acquired Furie Operating, Kitchen Lights was an undeforming field in need of fixing, but with considerable potential.
In a Dec. 18, 2020, presentation in Anchorage to Commonwealth North, Hendrix said, “When we took over (July 1, 2020), we basically had to go in and fix everything.”
Furthermore, “there was not one Alaska person working in our field (including contractor personnel). There was only one person in the Anchorage office. … Well files were in boxes. … We’re going to have to go back and work all of the wells over to have access to all the original reserves because in a lot of it you have tubing inside the well covering up the flow,” he said.
Among the accomplishments Hendrix mentioned in that presentation were:
* Majority of field operations contracting had been turned over to Alaska-based Udelhoven Oilfield Services, which was founded in Kenai in 1970 by Jim Udelhoven who Hendrix said was “one of those men whose word you can trust with a handshake.”
* Hired Alaskan Kevin Smith (first employee ever for Furie in the field), who had retired from BP after a 25 year-plus career on the North Slope to take the position.
* Brought in production safety management coach Daryl Leech.
* Functioning Anchorage office vs. a Houston office.
* Anchorage local employees up 500%, field employees up 1000%.
* Established data management control.
* Performing well surveys on two production wells.
“It was a journey, it was a challenge to get where we are today,” Hendrix said in the presentation.
More than once he thanked the Alaska Industrial Development and Export Authority for providing financing to acquire Furie Operating and its Kitchen Lights infrastructure, as well as loan some of the money needed to help develop the Beluga and Sterling formations within the Kitchen Lights unit.
“It was the only financial institution at the time in the state that would help us - even across the United States and North America it was very tough to get financial backing for a project in Alaska,” Hendrix said.
History of unit formation Following a series of battles over work commitments involving several small players in Cook Inlet, the state formed the 83,394-acre Kitchen Lights unit in 2009 to prevent a legal battle and encourage exploration and development activities at a time of dwindling local supplies.
The unit combined the Escopeta Oil & Gas Co.-operated Kitchen unit, the Renaissance Alaska LLC-operated Northern Lights prospect and the Pacific Energy Resources Ltd.-operated Corsair prospect.
So, the state took three previously distinct prospects that were unitized and then administratively divided into four exploration blocks: Corsair, North, Central and Southwest.
A corporate shuffle in 2011 put Furie in charge of the project.
Early plans of exploration for Kitchen Lights required Furie to drill at least one well in each exploration block. The company drilled exploration wells across the unit between 2011 and 2014 before shifting to development, but it left the North and Central blocks underexplored and the Southwest block undrilled.
All development activities to date - October 2021 - have occurred within the Corsair block.
Early development work had involved construction of the Julius R platform, which was the newest platform in Cook Inlet and structured to have six wells online.
Another piece of the infrastructure building was the subsea pipeline between the field’s onshore facility at Nikiski and the platform. It’s 16 miles long and 16 inches in diameter.
The third piece of infrastructure was construction of the onshore gas processing facility, which can reportedly handle five times what it is handling today - an average of 11,285 thousand cubic feet per day in August 2021, per the Alaska Oil and Gas Conservation Commission.
Furie under its previous owners brought the unit into production from a single well in July 2013 and subsequently drilled three more production wells, with the last being the KLU A-4 well in October 2018.
By the time HEX CI took control, one of the four wells was offline, awaiting upgrades and repairs. And the three other producing wells were underperforming.
HEX CI’s goal was, and continues to be, having all four existing wells producing natural gas from both the Beluga and the Sterling formations, with much of the upside in the Sterling.
Eighth POD work planned Fast forward to Oct. 15, 2021, when HEX’s Furie Operating filed its eighth plan of development for the northern Cook Inlet Kitchen Lights unit with Alaska’s Division of Oil and Gas. The eighth POD period will run from Jan. 3, 2022, through Dec. 31, 2022.
Although Hendrix, told Petroleum News Oct. 19 that Furie Operating would be filing an addendum to the eighth POD listing more well work the company hoped to do in the unit, Furie Operating did commit to some things in the Oct. 15 filing, as well as describe an appreciable amount of work accomplished so far in 2021 under the seventh POD.
Furie Operating said it planned to continue ongoing efforts from the seventh POD, which would end Jan. 2, 2022, along with evaluating development options for the state leases it won in the June 2021 Cook Inlet areawide lease sale. Specifically, in its eighth POD period Furie Operating would:
* Continue development of proven gas reserves in the KLU. The 2021 well intervention campaign was still in progress; results or new information were coming in almost daily. The specific activities planned for individual wells in 2022 would be determined after the 2021 intervention campaign was complete and sustained production results were available.
* Continue efforts to optimize production, enhance safety and minimize environmental footprint of KLU related infrastructure.
* Continue progress on establishing a participating area along with a possible unit expansion.
* Evaluate drilling of additional wells on existing lease acreage and new acreage acquired in the state’s June 2021 lease sale.
“At this time, we are trying to bring all wells back online,” Hendrix told PN, noting KLU A-1 was giving them some difficulties.
Lots of work already done In its review of work promised for the seventh POD period from July 1, 2020, through Jan. 2, 2022, Furie Operating had committed to doing the following, noting in the eighth POD whether it had met its commitments:
* Met - Continue development of proven gas reserves in the KLU.
* Met - Continue and increase production of natural gas on the Julius R platform.
* Met - Continue exploration of the KLU, including the new analysis of seismic data and offset wells to identify specific targets for exploration outside of the Corsair block.
* In progress - Update joint operating agreement to reflect the realities of operating in Cook Inlet.
Furie Operating said all four wells on the Julius R. platform have had one or more downhole interventions completed, or intervention work was in progress to continue development and increase production from the KLU.
Well KLU A-1 had dozens of feet of fill bailed from the tubing to allow access for reperforations and additional perforations in the Beluga interval. The perforations were successfully executed. The well was incapable of sustained flow during the initial post intervention startup attempt. Further diagnostics were performed and another attempt to initiate flow was in progress. (The old Furie, prior to HEX’s ownership, had never produced this well from the Beluga formation.)
Well KLU A-2 had additional perforations added in the Beluga interval.
Well KLU 3 had two sliding sleeves shifted to the open position to allow additional Beluga formation production.
Well KLU A-4 had never produced from the Beluga formation due to a plug in the tailpipe with several feet of solids above it, along with multiple wireline tool strings and wireline in the well. The tubing tailpipe was perforated above the fish to allow production from the Beluga.
Well KLU A-4 also had a wireline tool string fish retrieved from the well, several dozen feet of slickline recovered, and several dozen feet of solids bailed out of the tubing tailpipe. Bailing and fishing efforts were ongoing. The objective was to allow access to the liner below the tailpipe for additional Beluga perforations.
A produced water handling system was installed primarily for the Sterling formation, and appropriate permits obtained to allow production of gas zones with higher water content. This may result in increased gas recovery once the formation is brought on production.
A detailed assessment of the KLU area and adjacent acreage was completed and led to Furie Operating being the high bidder on adjoining leases at the June 2021 lease sale.
An amendment to the joint operating agreement was submitted to the working interest owners. No agreement had been reached regarding this amendment.
PA, technical presentation The division had also wanted Furie Operating to complete its existing participating area applications or submit a new PA application on or before Dec. 31, 2020. Furie said in its eighth POD that was continuing to evaluate available data to submit a draft PA application for review.
In an August 2021 meeting with the division, agency staff suggested that Furie consider unit expansion prior to finalizing the draft PA application.
During the seventh POD period the division also wanted a technical presentation from Furie to the division by July 1, 2021, detailing with specificity the progress made on the subsurface description of the KLU along with any other activities undertaken by Furie Operating related to further development of the KLU and exploration activities.
The company said its personnel spent much of the first half of 2021 analyzing all available data in preparation for the June Cook Inlet lease sale. Due to confidentiality concerns prior to the sale, Furie Operating told the division that it “preferred not to provide specificity regarding progress on the subsurface description.”
During its August 2021 meeting with the division the company offered to provide a technical presentation at its Anchorage office for division personnel. As of October 2021, this presentation had not yet been scheduled, but there were ongoing conversations between the agency and Furie Operating staff.
Development obstacles “If a number of obstacles are reduced Furie believes there is potential development opportunity within the Kitchen Lights unit and adjacent acreage to provide clean, reliable energy for Alaskan residents for many years. Furie’s participation in the June 2021 Cook Inlet lease sale provides clear evidence of this premise,” Hendrix told the division and PN.
The company’s high bids at that lease sale totaled $325,605.23.
“Unfortunately, enthusiasm for development must be tempered with the reality of the unfavorable economic climate in the state of Alaska,” Hendrix told PN and expressed in his remarks to the division
“The delay in paying earned tax credits and excessive tax valuation of the KLU infrastructure are a couple of examples that conspire to limit both internal and external capital availability for development,” he said.
The previous owners of the Kitchen Lights assets are still owed $103 million by the state of Alaska for tax credits that would flow through a HEX company to them. If the state doesn’t pay the $103 million by 2025, HEX is on the hook to pay a $15 million penalty to the previous owners.
Furthermore, the Alaska Department of Revenue imposed a property tax on the fixed assets and related infrastructure of Kitchen Lights, assessing its value at $81.2 million, even though its value in bankruptcy court was the $5 million paid by HEX CI.
That DOR assessment earned Furie a $1.6 million tax bill, which Hendrix told PN was “unfair and excessive.” It is money that should be allocated for well work, he said.
The COVID-19 pandemic also had “significant impacts on KLU activity over the last year and may continue into 2022,” Hendrix told the division in his concluding remarks.
“I took a gamble on buying Kitchen Lights; I know that. But I figured I should be able to trust my state government to treat me fairly,” he told PN. “Obviously, that’s not what’s happening at this time. The state agencies need to quit operating in silos and start cooperating and working with each other.”
| 