An Alaska venture
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HEX Cook Inlet moving ahead with re-invigorating Kitchen Lights gas field
Alan Bailey for Petroleum News
Having completed its purchase of Furie Operating Alaska and on July 1 taken over operatorship of the Kitchen Lights gas field in Cook Inlet, HEX Cook Inlet LLC is forging ahead with re-invigorating the field, John Hendrix, CEO and president of HEX, told the board of the Alaska Industrial Development and Export Authority on May 19. Hendrix emphasized his company’s focus on establishing HEX as an Alaska company - the company now has 21 employees who are Alaska residents and just two employees from out of state. Prior to the takeover, Furie had just one full-time Alaska employee, Hendrix said.
The Kitchen Lights field produces gas through the Julius R offshore production platform, delivering the gas to onshore processing facilities on the Kenai Peninsula through a 15-mile subsea gas pipeline.
An Alaska company HEX is 100% owned by Alaskans and is the only Alaska oil and gas company operating in the state, Hendrix said. Although HEX has retained Furie Operating Alaska as the legal name of the company operating the field, Furie, and its associated companies, are now wholly owned by HEX.
In addition to Hendrix, the HEX management team consists of Chief Operating Officer Rick Dusenbery, Chief Financial Officer Kevin Hemenway, and Chief Geologist Alex Tworow.
HEX purchased Furie out of bankruptcy with AIDEA funding assistance in the form of a $7.5 million loan. The total purchase price was $34 million, Hendrix said. Hendrix emphasized his company’s success in repaying the loan.
“I’m proud to say that we’ve paid back in the last 10 months 33% of the principal on the note,” Hendrix told the AIDEA board.
Dealing with hydrates One of the reasons for Furie’s bankruptcy was a lengthy closure of the field in 2019 because of hydrate blockages in the subsea pipeline and in the onshore facility - hydrate formation resulted from the freezing of a combination of water and gas in the line. To prevent a recurrence of this type of problem, HEX has been aggressively pigging the pipeline and has established a protocol for monitoring the line for hydrate issues. In fact, the company did observe a hydrate related pressure increase in the line at one point in the past winter - the company shut the pipeline down for less than 24 hours to successfully rectify the situation, Hendrix said.
HEX has also installed a water processing facility on the Julius R platform. And in April the Alaska Department of Environmental Conservation issued a permit, allowing HEX to discharge clean wastewater from the platform. The primary purpose of the water processing is to enable gas production from the Sterling formation reservoir in the Kitchen Lights field - current production comes just from the Beluga formation. HEX now plans to conduct some testing of Sterling production.
Operational improvements HEX has also been reviewing the operation of the onshore processing facility, assessing the safety of the system and installing duplicated technology for blocking and bleeding the system. The company has also fixed some mis-positioning of sensors and gauges used to feed data into the control and data acquisition system for the facility. In addition the company encourages its field operators to find ways of improving operating efficiency.
“That’s where we want to be, when people start owning and bringing things forward,” Hendrix said.
The company has been able to reduce some of its costs by converting some unused wells previously drilled in the Kitchen Lights unit from a suspended to a plugged and abandoned status. That has eliminated about $350,000 per year in liability insurance associated with the company’s contingency plan, Hendrix said. The company is also saving money by placing needed equipment on the platform, rather than repeatedly incurring the costs involved in shipping the equipment to and from the platform, he said.
Excess capacity Hendrix commented that one of the economic challenges in operating the Kitchen Lights field results from the fact that the field facilities were designed and built to handle much larger volumes of gas than the field is currently producing. The underutilization of equipment such as gas compressors adds to the unit cost of the gas, he said. On the other hand, the company has no immediate plans for further drilling at Kitchen Lights - a new well, costing perhaps $15 million to $20 million, would draw down the company’s capital. Drilling at the Julius R platform involves the hiring of a jack-up drilling rig.
The platform can accommodate up to six wells and is currently producing from four wells.
On the other hand, HEX does have available some gas that is additional to gas that the company currently has committed under contract. One particular interest is finding ways whereby this gas might be used to manufacture products in Alaska, rather than simply selling raw gas, Hendrix said.
Alaska benefits And Hendrix emphasized the benefits that his company brings to Alaska, both in terms of local employment and in state revenues. The company pays royalties on its production to the state and others, in addition to property taxes. However, the company is challenging the level of the state property taxes, arguing that the state is significantly over valuing the company’s properties. If Hex had not purchased the property, the state would have faced the loss of royalties and an abandonment liability of about $16 million, Hendrix commented.
Hendrix expressed his pride in his company’s focus on benefits to Alaska, including the company’s environmental stewardship. The company also supports the local Kenai Peninsula through charitable giving and sponsorships.
But Hendrix also expressed caution that, although there are further opportunities for his company, it is important for the company to first consolidate its base.
“We’ve got a good management team. We’ve got a good reservoir. And we’re going to continue to try to build with what we’ve got,” he said.
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